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Friday, May 20, 2011

John Vachon Cherry July 1940"Migrant woman from Arkansas in roadside camp of cherry pickers, Berrien County, Michigan"

Ilargi:

Will the Pain Start in Spain?

Back In February, I saw a Dutch docudrama, entitled 2011: The Year the Euro Falls(Sorry, no English version available as far as I can see). It's nicely made, with cameos for many -prominent- Dutch politicians, newscasters and media pundits, and based on a screenplay by the former financial expert for Holland's Greens, Groen Links ('links' means left), Kees Vendrik. It paints -potential, and more or less fictional- developments in Europe in 2011.

First: Spain falls in summer. Spanish bonds are dumped, interest rates on them rise to 9%. Seemingly endless EU/IMF negotiations follow. This is not Greece or Ireland, after all (?!). These negotiations end in a deal, against a background of large-scale protests across Europe, not the least of which take place in the rich EU nations, where people are sick of bailing out the poorer periphery.

Then, the government of Belgium (there actually is one in the screenplay!) abdicates. Belgium is now a serious threat to Euro -financial- stability, and it gets billions in loans from the European stability fund. The EU stabilizes for a short period of time.

However, next up are elections in Ireland. Sinn Fein win a large majority. They decide to leave the Eurozone -and the EU itself-. Which means that Irish bonds, denominated in Euro’s, will have to be paid back in a much weaker "new punt", which can't be done. In other words, those EU -and US- banks that have bought Irish bonds will have to write down losses, very substantial ones.

The markets then turn their attention to Italy; its bonds come under pressure. The first victims are the French banks, which have huge exposure to Italian debt. Somewhat surprisingly, PM Berlusconi refuses to be bailed out by the EU. This raises his domestic popularity beyond levels anyone could have imagined. Berlusconi then turns to China and Libya (it's a 2010 scenario!) for financial aid. Italy closes its borders.

This becomes the start of the endgame. Germany and Holland -perhaps France- may still be able to sell some debt, but other EU countries are locked out of financial markets. Austerity measures even in Holland reach draconic levels.

The European leaders end up in a long drawn-out meeting in Versailles. The outcome is a full political and fiscal union: The Unites States of Europe.

Nice detail: first, Angela Merkel will lead Europe from Paris. Then, Sarkozy will rule for 2 years from Berlin.

So far Mr. Vendrik’s fictional scenario. And that's just what it was meant to be: what might happen, not what will. Or was it?

Still, what brought this back to mind is what we see coming from Spain the past few days. Oscar Gutiérrez writes in - very mainstream- El País:

The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the "alternative globalisation" movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.

All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships.

Revolts that have grown and matured while French, Italian, English and Greek youth have been surging into the streets to oppose plans for the social welfare cuts that have been Europe’s response to the sharp economic downturn. Spain was waiting for its moment.

The first to get off to a start was Nolesvotes (Don’t vote them in), an initiative calling on the electorate not to vote for Spain’s mainstream parties, accusing them of taking advantage of electoral law to perpetuate, in Parliament, “alarming levels of corruption in Spain." There followed calls to parties from web movements such as Avaaz and Actuable to strike from their electoral lists all politicians indicted or convicted of corruption. [..]

“When we grow up, we want to be Icelanders!" cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners.

Ilargi: And that's sort of peanuts compared to what Jonathan House and Sara Schaefer Muñoz have in the Wall Street Journal:

Weekend elections that threaten to drive Spain's ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country's drive to avoid an international bailout.

Five months ago, a government change in Spain's Catalonia region revealed a budget deficit more than twice as big as previously reported. Now, a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of "hidden debt" owed to health clinics and other suppliers.

Economists, analysts and anecdotal reports from companies that supply local governments suggest there is widespread, unrecorded debt among once-free-spending local governments. Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services.[..]

Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments. If such skeletons come out of the closet in coming weeks, Spain's cost of funding could continue to rise—throwing the country back into the limelight after it has struggled to demonstrate it doesn't need to be bailed out like Greece, Ireland and Portugal. "Investors are worried about the regions, given that there has a been precedent in Spain and other countries of debt not being recorded properly," said Luigi Speranza, a BNP Paribas economist.

Sunday's elections, which will be held in 13 of the country's 17 regions and its more than 8,000 municipalities, threaten to be hard on Prime Minister José Luis Rodriguez Zapatero's Socialists. Polls show Socialist-led governments could be unseated in Castilla-La Mancha, the Balearic Islands, Asturias and Extremadura regions. Undermined by a 21% unemployment rate and a perceived slowness in reacting to the country's economic crisis, the Socialists could also lose control of the municipal governments of Barcelona and Seville, the country's second- and third-largest cities.

The social fallout from the poor economic conditions is evident in Spain this week as waves of protests swept the country. Young people took to main squares in Madrid, Barcelona and Valencia on Thursday to protest unemployment among those in their 20s and 30s, which has reached 50% in some areas, and the government's austerity program.

Ilargi: As you may recall, I've said forever that Spain will be the EU dealbreaker. And as we saw, again, not that long ago, for an entire decade, from 1997-2006, Spain built more homes than England, France and Germany combined, of which far too many to count now stand empty. Plus, much of the financing for all these superfluous homes was done through still seemingly healthy large Spanish banks like Santander and BBVA.

The debts involved have thus far remained hidden, in the same manner that Wall Street banks to date hide their losses, though a combination of long-stretched fake accounting (think FASB157) and multi-billion bail-outs in taxpayer funds. It's hard to foresee, but the uncovering of hidden debts through this weekend's Spanish local elections that the Wall Street Journal article talks about might be the first step in a cascading debt "truth-finding" that may well go way beyond Spanish borders. It's certainly about time we figure out who owes what to whom.

Santander, for one, has conducted quite aggressive acquisition tactics in Britain over the past few years. And is connected to the entire global financial system in more or less the same ways that all of the too big to fail institutions are. If the squares of Madrid and Barcelona come to resemble anything like Cairo's Tahrir square, it's hard to say what will come out of this. What we know for sure is that the 20%+ unemployment rate (40%+ for young people) won't be solved on Monday. Nor will the untold thousands of ghost homes be sold. And that means Spain is a bond market accident waiting to happen, be it tomorrow or a few months from now (it won't take years). In that sense, the docudrama scenario painted above can never be that far off.

On to something completely different, (though, is it ever?). I was reading a piece by the madhedgefundtrader at Recourceinvestor, also published at Zero Hedge, on Harry S. Dent Jr. Now, I have to admit, and it doesn’t give me shame, that I didn't know Harry from Sally. Turns out, Mr. Dent, a fund manager sort of guy, predicted the Japan collapse as long as 30 years ago, and a Dow of 10K 20 years back. On the other hand, as per Wikipedia, Harry's had a few failed predictions too. Which is fine. A man who's never been wrong is a man who never can learn.

Going through the madhedgefundtrader's account of Mr. Dent's words, I couldn't help but notice how close his predictions, ideas, give it a name, are to what we at The Automatic Earth have been saying ever since we stuck our heads above water. Take a listen:

Harry argues passionately that we are witnessing the end of the third great bubble in debt, hot on the heels of earlier forays into madness in technology stocks and real estate.

Add public and private debt from all sources, and it totals $130 trillion, the greatest accumulation of IOU’s in history. The Federal Reserve is now manipulating all markets, and the exercise is certain to end in tears. The only way out from this will be to suffer an economic and financial crisis worse than we have seen to date.

The triggering factor will be the continued collapse of the residential real estate market. Continued shrinking home equity means that there will be ever fewer buyers in this market. That makes a laughing stock of current bank valuations, which have yet to be marked to market, and still obscure massive losses from the last crash. [..]

A key part of Harry’s work revolves around generational spending patterns. Americans see spending peak when they reach the ages of 46-50, and bleed off from there. He blends this perspective in with historical data on demographics and some traditional Eliot Wave Analysis to produce one of the most refined long term views in the marketplace.

The big problem is that we have 90 million baby boomers followed by only 70 million “echo boomers”. Falling family sizes from the 1940’s onward are going to come back to haunt us. Adjust for the falling earnings of the next generation, and their net consumer spending could drop by half. As I am fond of telling those who attend my strategy lunches, don’t plan on selling your house to your kids, especially if they are still living in the basement.

Ilargi: As I’ve always maintained, in the end the health of the US economy can be gauged through 2 factors: housing and (un)employment.

Stocks. Stock markets on crack are about to join Lindsey Lohan and Charlie Sheen in rehab. Harry didn’t bat an eyelash when he looked me straight in the eye and told me that the Dow was going to 3,300 by 2014. The only unknown is weather the crash starts now, or whether liquidity manufactured by the Federal Reserve can keep the party going for another six months. Put a gun to Harry’s head, and he’ll tell you that the peak isn’t coming until August. But the smart money is getting out, with the put/call ratio, great leading indicator, rocketing to 1.9 in February.

Ilargi: I'm not even going to try to give specific numbers for specific dates, and I don't find them particularly interesting. We're not here for short term views, we do long term, and across several fields: the Big Picture. Which has only one way to go: way below the gutter.

There will be no place to hide, as this will be a global event, and that reallocation towards more defensive sectors will be a waste of time. The Australian stock market will vaporize from 6,000 to 1,000, while Hong Kong will get pared back from 24,000 to 8,000. China is the greatest bubble and could take the biggest hit. The rising middle class will not take their first ever big recession lightly, and coming political turmoil is a given. [..]

Ilargi: Another long time prediction at TAE: China will implode upon itself through internal struggle. Mind you, it may still -many years from now, when we're all gone- emerge as a formidable global power, but only in ways that have little to do with what we see as global today. More like the Romans were such a power.

Bonds. While hard times for equities are ahead, bonds are about to enjoy the second coming. The traditional flight to safety bid is about to come back with a vengeance. The wholesale destruction of vast quantities of debt through default is having the unintended consequence that it is creating a bond shortage. [..]

Ilargi: Obviously, there will come a time when government debt will at least seem to be the safest bet around. And it won't be Spain's, by the way.

The Dollar. Just as we are going to see a return of the Treasury bond, the dollar will enjoy a renaissance as well. Harry argues that the collapse of the plethora of asset bubbles we now see will bring a multiyear bull market for the greenback that could take us up 40% from here. That could take the Euro down to its foundation level around $0.90. Debt defaults not only create bond shortages, they foster dollar shortages as well.

Ilargi: This is the one point that very few people seem to be able to catch on to. When deleveraging and defaults happen in today's global economy, and there will be plenty of that around, when debts will have to be paid back in general, there is a particular feature of the US dollar that will make it very much in demand. That is, there is way more debt denominated in USD (the reserve currency) than in any other currency. Which means debtors need all come purchasing that USD to pay off their debts, and there is no way in hell or heaven that it won't rise far above where it stands today in currency markets.

Oil. If there is one commodity not expecting another Great Recession, it is crude oil. Slow the economy more than traders expect, and Texas tea drops in value by half. Strip out the monetary demand from those seeking a dollar alternative, and it halves again. Settle down the Middle East, and it halves a third time. Yes, Harry Dent is predicting that crude will fall from $115 a barrel today (and $128 for Brent), down to $15 by 2015.

Ilargi: Oil is a very hard one to predict. Still demand is already down today. There's a sh*tload of speculative money in it, much of which will leave when margin calls are made (and USD is needed). Then again, give me 2 more Fukushima's and who knows? Still, given what a fast slowing economy and the departure of casino money will do, how could oil stay above $25? Far fewer people will have purchasing power even at that level.

Precious Metals. If oil is wearing a toe tag, will gold be far behind? Coming deflation will cut the inflationistas off at the knees. A strong dollar sends those looking for alternatives into the Looney Bin. Take these frills away, and the barbarous relic becomes just a heavy rock that will take it from $1,550 an ounce, down to $250-$400. Gold bugs are about to get doused with insecticide. As for silver? How about a move from $50 to $4-$8?

Ilargi: Again, a prediction we agree with, We're not that hot on PM. Their price levels can hold only as long as FASB 157 does. In other words, as long as Meyer Lansky controls US accounting standards, way to go. But once that charade stops, everything you posses will plunge in relative value but the love of your kids and family, your friends and community, and hopefully your land and your shelter.

Not a popular view, I know, and I’m not so sure Harry S. Dent Jr. know it, but if you draw his views to a logical conclusion, investors like him (i.e. all "investors" but a precious few exceptions) are a fast dying breed. And as my regular readers know all too well, I've said that a thousand times if I've said it once, as well.

And Spain might just be big enough to trigger the entire thing. Not that it’s all that important. The outcome is painfully clear when it comes to the global economy.

Weekend elections that threaten to drive Spain's ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country's drive to avoid an international bailout.

Five months ago, a government change in Spain's Catalonia region revealed a budget deficit more than twice as big as previously reported. Now, a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of "hidden debt" owed to health clinics and other suppliers.

Economists, analysts and anecdotal reports from companies that supply local governments suggest there is widespread, unrecorded debt among once-free-spending local governments. Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services, said Fernando Eguidazu, vice president of the Circulo de Empresarios business lobby group in Madrid.

Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments. If such skeletons come out of the closet in coming weeks, Spain's cost of funding could continue to rise—throwing the country back into the limelight after it has struggled to demonstrate it doesn't need to be bailed out like Greece, Ireland and Portugal. "Investors are worried about the regions, given that there has a been precedent in Spain and other countries of debt not being recorded properly," said Luigi Speranza, a BNP Paribas economist.

Sunday's elections, which will be held in 13 of the country's 17 regions and its more than 8,000 municipalities, threaten to be hard on Prime Minister José Luis Rodriguez Zapatero's Socialists. Polls show Socialist-led governments could be unseated in Castilla-La Mancha, the Balearic Islands, Asturias and Extremadura regions. Undermined by a 21% unemployment rate and a perceived slowness in reacting to the country's economic crisis, the Socialists could also lose control of the municipal governments of Barcelona and Seville, the country's second- and third-largest cities.

The social fallout from the poor economic conditions is evident in Spain this week as waves of protests swept the country. Young people took to main squares in Madrid, Barcelona and Valencia on Thursday to protest unemployment among those in their 20s and 30s, which has reached 50% in some areas, and the government's austerity program. Demonstrators are hoping their ranks will swell over the weekend as people head to the polls.

Nearly a year ahead of March 2012 Spanish national elections, a poll last month by the state-owned Center of Sociological Investigations, or CIS, forecast the opposition Popular Party could capture 43.8% of the vote, while the Socialists could get 33.4%.In the 2008 elections, the Socialists won 43.6% of the vote, compared with 40.1% for the conservative PP. Spanish Finance Minister Elena Salgado has told journalists there are no "hidden deficits" on the accounts of Spain's regions. Spain lately has steadied—if not dismissed—concerns about its finances by slashing its budget deficit to 9.3% of gross domestic product in 2010 from 11% of GDP in 2009.

But most of the reduction was thanks to central-government cuts. Regional and municipal governments, which piled on debt during the economic boom years that followed Spain's adoption of the euro in 1999, control half of spending in Spain, and have so far made little progress on this front. They also got into the habit of paying their suppliers late to free up funds for other spending projects. According to Spanish central bank data, regional and municipal governments had around €21 billion ($29.9 billion) in unpaid invoices on their books in 2010, equal to about 13% of current outstanding debt and nearly double the amount in 2003.

The "hidden debt" problem first popped up in Catalonia after elections in the fall that resulted in moderate Catalan nationalists unseating a Socialist-led coalition. In December, the central finance ministry said the region's debt-to-regional-GDP ratio was 1.7% as of the third quarter. The old government, in an outgoing report, later disclosed the full-year deficit could be as high as 3.3%.

The new government found that the 2010 deficit was actually 3.8%, thanks to lower-than-anticipated tax revenues as well as millions in unrecorded late payments to suppliers. Among them: €852 million in unpaid bills to health-care providers such as hospitals, according to the current government's spokeswoman. In response, the new Catalonian government drafted a draconian 2011 budget that foresees a 10% cut in expenditures and includes downsizing of public-sector companies and cut backs in health services.

Now, the fear is that the Catalonia phenomenon will be repeated across the country. Following the Catalonian elections, reports surfaced Spanish newspapers that the government of the east-coast region of Valencia had €1.3 billion of unpaid bills to health-care suppliers that "were put in a drawer" and not counted as part of that region's 2010 deficit. Valencia officials declined to comment on the reports. "If [new governments] want to force changes, they are going to have recognize the debt," said Luis Garicano, professor of economics and strategy at the London School of Economics.

Mr. Garicano, who worked on a 2009 study on the Spanish health-care system with McKinsey & Co., estimates that unrecorded payments to providers of health products and equipment may be just under €10 billion. While that amount would add only about 1% to the country's debt-to-GDP ratio, such a widespread payment backlog, which Mr. Garicano says often reaches 600 days of delay, it "is a massive problem to a whole range of businesses," he said, and would crimp the economic growth Spain urgently needs.

Regional and municipal governments are benefiting from European Union rules that allow them to keep much of the debt of public-sector companies, such as utilities, off their books. Lorenzo Bernaldo de Quirós, a Madrid economist, calculates that around €26.4 billion of debt isn't being recorded, even though local governments are ultimately on the hook for it. Hidden-debt concerns now play a central role in campaigning in regions like Castilla-La Mancha, where the Socialist party risks losing its 30-year hold on power. In an April survey, the Center of Sociological Investigations forecast the PP will win 46.3% of the vote to the Socialists' 45%.

According to the PP and local business leaders, the region hasn't booked 90,000 unpaid invoices of around €1 billion. A local businessman said a lengthy payment authorization process lets regional authorities delay recording invoices they receive, that they are booked as expenses only when the region is nearly ready to make payment. Regional government officials wouldn't comment on the claim.

In an interview, Maria Dolores de Cospedal, the PP's candidate to be the next president of Castilla-La Mancha, predicted a new regime would find hidden debts and promised to clean them up. "It's time to face this problem," she said, adding the first thing she will do if elected is commission an audit of Castilla-La Mancha's accounts. She also says she will close more than half of the region's 95 public-sector companies and privatize the local television station, which she said loses €70 million a year.

There are also signs of problems in the southern Andalucia region, where cites are, on average, 28 months late in paying their bills, according to Francisco Jardon, president of the trade association representing the largest municipal sanitation companies.

Jaen, a city of 117,000 nestled against steep hills in the olive-producing region, is one of the worst offenders. It owes its trash collection company €200 million, the result of debt that piled up for nearly a decade. The company, in turn, stopped paying its trash collectors late last year, triggering a strike that left mounds of garbage piling up in the town's streets and squares. In October, police and fire vehicles were left without fuel after the station that supplied them shut off its pumps in a demand for past-due payment.

The current Socialist administration of Jaen says it includes payments to suppliers in its deficit tally of around €127 million. The opposition conservative party, however, has maintained that debt is actually higher. Bruno Garcia, who heads the city's chamber of commerce, says he increasingly hears from companies that the government asks for "a loan of service" in which a supplier, such as a road maintenance company, performs services like replacing streetlights as a favor—but holds off on submitting a bill.

"There's an effort not to formalize the debt," he said. A city hall spokeswoman declined to comment, except to say that the current mayor is managing the fiscal situation "as best she can."

After passively submitting to the crisis, young Spaniards have finally taken to the street. Breaking out on the eve of municipal elections, the protests of recent days have been inspired by those in Iceland that led to the fall of the government in Reykjavik.

One morning in October 2008, Torfason Hördur turned up at what Icelanders call the “Althing”, the Icelandic parliament in the capital city, Reykjavik. By then, the country's biggest bank, the Kaupthing, had already gone into receivership and the Icelandic financial system itself was in danger of going under. Torfason, with his guitar, grabbed a microphone and invited people to talk about their dissatisfaction with the freefall of their country and to speak their minds.

The following Saturday Torfason’s initiative brought dozens of people back to the same spot. Those Saturdays in the autumn of 2008, rallying to the People's Voices movement, led to the proclamation to dissolve Parliament on January 23, 2009, and to hold elections. Now the murmur of the Icelanders has reached the throats of the thousands of demonstrators that gathered in several cities around Spain on 15 May: “Spain arise, another Iceland", "Our model – Iceland" were some of the yells from the crowds.

The Icelanders didn’t leave it at this. They shook the foundations of the government, went after the bankers who led them into bankruptcy and said ‘No' in a referendum on repaying debts of some four billion euros to the UK and the Netherlands. Better still: they formed an assembly of 25 citizens elected to carry out constitutional reform. It was an entirely silent revolution that, while the media was focused overwhelmingly on the Arab uprisings, was rescued from oblivion by a web of social networks beyond the control of a state.

A movement spawned by the internetBut those voices calling for real democracy are not just being raised in Iceland, a country of about 320,000 inhabitants. Here in Spain, the umbrella organisation for various Spanish movements – Democracia Real Ya (Real Democracy Now) – already lists among its proposals some 40 points ranging from controlling parliamentary absenteeism to reducing military spending through to abolishing the so-called Sinde law (a law restricting on-line infringements of copyright).

To this federation some 500 organisations from all sectors have rallied. But not one single political party. Not one union, either. The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the "alternative globalisation" movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.

All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships.

When we grow up, we want to be IcelandersRevolts that have grown and matured while French, Italian, English and Greek youth have been surging into the streets to oppose plans for the social welfare cuts that have been Europe’s response to the sharp economic downturn. Spain was waiting for its moment.

The first to get off to a start was Nolesvotes (Don’t vote them in), an initiative calling on the electorate not to vote for Spain’s mainstream parties, accusing them of taking advantage of electoral law to perpetuate, in Parliament, “alarming levels of corruption in Spain." There followed calls to parties from web movements such as Avaaz and Actuable to strike from their electoral lists all politicians indicted or convicted of corruption. And the nearly 2,000 young people who supported the Juventud sin Futuro (Youth Without a Future) marches of April 7 have carried on from that first modest attempt, which by May 15 had grown into the popular outcry that exploded in several Spanish cities.

“When we grow up, we want to be Icelanders!" cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners. Many Saturdays in Iceland were needed before citizens won the changes they had demanded. Spain’s first Sunday has taken place, and was followed by a Tuesday [May 17]- but there’s still a long way to go.

The European Central Bank has threatened to stop lending to banks using Greek government bonds as collateral if Athens changes the terms of the debt, a move which could bring down the country's banking system.

The eurozone's central bank has played its "last card" in an attempt to prevent the debt restructuring it fears, said analysts. The cost of insuring Greek sovereign debt rose to more than €1.33m to protect every €10m of bonds as the threat laid bare the divisions in Europe over how to resolve the crisis. The Mediterranean nation is struggling to carry out the reforms agreed under its €110bn EU/IMF bail-out, prompting fears Athens will not be able to repay its debts, currently totalling about €340bn.

EU officials have been floating the idea of a "soft" restructuring of the debt, whereby the holders of the bonds see the terms extended. However, Juergen Stark, ECB chief economist, said that if the country altered its repayment terms, the eurozone's central bank would not be able to lend to Greek banks putting up government bonds as collateral. "A sovereign debt restructuring would undermine the eligibility of Greek government bonds," he said. "A continuation of liquidity provisions would be impossible."

If the ECB did follow through with its threat, the country's banking system would fail, said Jacques Cailloux, an economist at Royal Bank of Scotland. Greek banks have borrowed some €88bn from the ECB. "This is the last card in the hands of the ECB in warning about the implications of a restructuring," he said. The central bank is vehemently opposed to a restructuring of Greek debt, worried about a possible chain reaction through Europe's financial system and the losses it would face on the up to €50bn of bonds on its own books.

Most thought the ECB was unlikely to carry out its threat. "It is a way by which the ECB expresses its disagreement," said Luca Cazzulani, a stategist at UniCredit. Nonetheless, eurozone sources said governments were now considering asking holders of Greek debt to "roll over" the bonds – buy new ones when older ones mature – rather than extend the length of the debt. Herman Van Rompuy, president of the European Council said a new IMF chief to replace Dominique Strauss-Kahn must be found quickly. "We are feeling the lack of leadership in solving the Greek crisis," he said.

The yield on Greece’s 10-year government bond rose to record levels as speculation rose that the eurozone nation would default on its debt repayments. As the 10-year bonds were sold off, the yield climbed 61.5 basis points to 16.75 per cent, a new record, on Friday. The yield on the equivalent German note, meanwhile, eased to 3.12 per cent as Bunds were sought out as havens.

The debate over whether Athens should restructure its debt intensified this week as top eurozone finance ministers met. There was fierce opposition to restructuring from the European Central Bank, and even Angela Merkel, German chancellor, ruled out any immediate reordering of Greece’s repayments.

From the sidelines, Hans-Werner Sinn, head of Germany’s influential Ifo economic institute, suggested Greece’s recovery would be best aided by dropping out of the single currency and returning to the drachma.Luxembourg prime minister and chairman of the committee of eurozone finance ministers suggested the idea of a “soft restructuring” to help limit the losses to private bondholders. “Developments over the past week have done nothing to alleviate the ambiguity regarding potential official measures,” said Marc Chandler at Brown Brothers Harriman.

While Spain has managed largely to sidestep the worst of the contagion effects from Greece in recent weeks, yields on its benchmark bonds rose on Friday as uncertainty ahead of Sunday’s regional elections added to investor nerves. Spain’s 10-year yield rose 9.1bp to 5.44 per cent. Madrid successfully sold €2.5bn of the benchmark 10-year notes at an auction on Thursday, and paid a slightly lower premium than at the previous sale of the same bonds on April 20.

But the spread over the equivalent German 10-year Bund rose to 236bp, the highest seen since January. “The ongoing debate about a potential restructuring of Greek sovereign debt has put European peripheral sovereign debt markets under pressure,” said Fritz Engelhard at Barclays Capital.

European Central Bank Executive Board member Lorenzo Bini Smaghi rejected any debt restructuring for nations such as Greece as it would "jeopardize all of Europe." A debt restructuring, whether "hard or soft," would require a recapitalization of banks, which would be hard to carry out in a country that has defaulted, Bini Smaghi said in a speech in Milan today.

"The state of public finances in Greece, Ireland and Portugal represents the biggest challenge of the coming years," he said. "Time has been lost talking about how to come up with a way to reduce the debt, but if we accept this we’ll jeopardize all of Europe. A solution for reducing debt but not paying for it will not work."

European finance ministers for the first time this week floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Eighty-five percent of international investors surveyed by Bloomberg last week said Greece will probably default on its debt, with majorities predicting the same fate for Ireland and Portugal.

Bini Smaghi’s opposition to restructuring was echoed by fellow ECB Executive Board member Juergen Stark, who said in Greece today it would be a "catastrophe" and undermine the collateral the nation’s banks use to gain loans from the ECB.

Central bankers are putting up the most vocal opposition to restructuring. The Frankfurt-based ECB has bought 76 billion euros of bonds of fiscally struggling countries in the past year and would suffer with private investors in any restructuring. Greece, which under its bailout is due to return to financial markets next year to sell about 27 billion in bonds, "must convince its citizens to pay taxes" and "retire at age 65 as everyone else does in the Western world," Bini Smaghi said. "Greece in a few years can carry out state-asset sales equal to 25 percent of gross domestic product."

Bini Smaghi also said he sees "upward inflation risks" and the ECB is continuing to monitor the price situation. "We can’t ignore price tensions just because some countries are in difficulty. The ECB is helping these countries with liquidity." The ECB raised its benchmark for the first time in almost three years in April to stem rising inflationary pressures. Euro-area economic growth accelerated to 0.8 percent in the first quarter from 0.3 percent in the previous three months, data showed on May 13, when the European Commission also raised its 2011 inflation forecast.

If Athens reneged on its debts it would shatter the markets' confidence in the eurozone project

It was less than three years ago that the failure of Lehman Brothers sent tremors through the global financial system, threatening the existence of every major bank and triggering the most severe economic crisis since the Great Depression. As Europe's policy elite met for fresh crisis talks today, the dark fear that haunted everyone around the table was this: if the bankruptcy of a middling-sized Wall Street investment bank with no retail customers could have such dire consequences, what would happen if the Greeks decide they have had enough and renege on their debts?

Could Greece, in other words, be the new Lehmans? Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse.

Given that gloomy prognosis, the European Union and the currently rudderless International Monetary Fund know something has to be done but are not quite sure what. To be fair, it's a tough one. A single currency that involved a hard core of European countries that were broadly similar in terms of economic development and industrial structure might just have worked. Bolting together a group of 17 disparate economies with different levels of productivity growth, different languages and different business cultures was an accident waiting to happen, and so it has proved.

The weaker countries, on the fringes of the single currency area, have not been able to cope with the disciplines involved in giving up control of their interest rates and their currencies, with the problem going much wider than the three countries – Greece, Ireland and Portugal – that have sought bailouts. Spain's housing boom and bust was the result of the pan-European interest rate being too low; Italy's increasing lack of competitiveness stems from a lack of exchange-rate flexibility.

It was also clear from the outset that the structure of monetary union would result in struggling countries being subjected to deflationary policies. Since the eurozone is not a sovereign state there is no formal mechanism for transferring resources from rich parts of the monetary union to the poor parts. Nor, given language barriers and bureaucratic impediments, is it easy for someone made unemployed in Athens to get a job in Amsterdam. Instead those countries seeking to match Germany's hyper-competitive economy have to cut costs, through stringent curbs on wage increases and fiscal austerity.

This was the plan A that was wheeled out for Greece last spring, when it became the first eurozone country to run into trouble, and it has been repeated for Ireland and Portugal. Plan A involved providing Athens with a bridging loan so that it could continue to meet its debt obligations, while at the same time insisting on draconian steps to cut Greece's budget deficit. Pain plus procrastination: the traditional recourse for policymakers who lack imagination, as Europe's have done throughout the sovereign debt crisis. Clearly, plan A has not worked, as anyone who has piled up too much debt on their credit card could have predicted.

Just like an individual who can't stop interest charges going up and up, despite trading down to a budget supermarket, cancelling the gym membership and abandoning the holiday, Greece has found that the belt-tightening has left it with a bigger central government budget deficit in the first four months of 2011 than it had in the first four months of 2010.

It's not difficult to see why this has happened. Those who put together Greece's programme underestimated the extent to which public spending cuts and tax increases would hamper the growth potential of the economy, particularly given the lack of scope for the currency to fall. Historically the IMF's structural programmes for troubled developing countries have involved devaluation, so exports became cheaper; but Greece's membership of the single currency has meant there has been no external safety valve to compensate for the domestic squeeze.

Greece needs to have the scope to grow its way out of its debt crisis. Failing that, the rest of the eurozone has to be prepared to stomach not just a second, but a third and perhaps even a fourth bailout so Athens can keep up with its debt repayments. Hence the drumbeat of speculation that Greece would be better off defaulting, or leaving the eurozone altogether.

There is no suggestion that the Greek government is planning anything of this nature. Default and devaluation pose big risks, particularly since the debts would have to be in a redenominated currency (like the drachma) that creditors would deem to have junk status. In the short term, Greece's economic and financial crisis would almost certainly deepen. Athens would prefer the EU to provide a second bridging loan and to reschedule its debts over a longer period so the interest payments become less onerous.

But that is at best a stopgap solution, because it does nothing to address the structural weaknesses of the eurozone. For this, there are really only two solutions. The first is to turn monetary union into political union, creating the budgetary mechanisms to transfer resources across a single fiscal space. That would fulfil the ambitions of those who designed the euro, and would recognise that the current halfway house arrangement is inherently unstable.

The second would be to admit defeat by announcing carefully crafted plans for a two-tier Europe, in which the outer part would be linked to the core through fixed but adjustable exchange rates. Neither option, it has to be said, looks remotely likely, although the collapse of Lehmans shows the limitations of the current muddling-through approach.

The eurozone's future will not be decided in Athens or Lisbon but in Paris and in Germany. Both the big beasts have invested vast stocks of political capital in "the Project", and insist that there will be no defaults and no departures from the club. Yet German public opinion was sniffy about the Greek bailout in May 2010, kicked up a fuss at being asked to pick up the tab for Ireland last November, and is positively furious about having to sort out the mess in Portugal. Despite the strength of the German economy, Angela Merkel is facing strong political resistance to more bailouts.

The political calculus is clear: cutting Greece and the other weaker euro-area economies adrift would end the dream of monetary union as a club where European countries, big and small, weak and strong, could rub along together with a single economic policy. But failing to cut them adrift could cost Merkel her job.

The probability of Greece defaulting or restructuring its debt has increased since the arrest of International Monetary Fund head Dominique Strauss-Kahn, Pacific Investment Management Co.’s Mohamed El-Erian said. "Don’t underestimate how important Dominique Strauss-Kahn was in coordinating action" among European nations, El-Erian, the chief executive officer of Pimco, said in a Bloomberg Television interview on "In the Loop" with Betty Liu. "It’s the worst possible time to lose your general. You need the IMF to coordinate this global healing."

European finance ministers for the first time have raised the possibility of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s 110 billion-euro ($156 billion) rescue has failed to restore the country to financial health. Europe would consider "reprofiling" Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday.

"He has been getting everybody to play from the same sheet of music," said El-Erian, a former deputy managing director of the IMF. "Without him it will be much more difficult to coordinate European governments." Strauss-Kahn was ordered held without bail yesterday by a New York judge and sent to the city’s Rikers Island jail complex after being charged with sexually assaulting and trying to rape a hotel housekeeper on May 14. Straus-Kahn, the managing director of the IMF, has denied the allegations.

Greece BondsEuropean governments have thus far ruled out shifting some costs to private bondholders and have instead relied on taxpayer-funded bailouts to stamp out the region’s sovereign debt crisis. Greek two-year yields declined one basis point to 23.4 percent as of 10:35 a.m. in New York. Ten-year yields climbed two basis points to 15.3 percent.

The IMF should focus on qualifications of candidates instead of geographic locations if a successor to Strauss-Kahn is sought, El-Erian said. Leaders of the IMF have traditionally come out of Europe. At the same time, he downplayed speculation he was a possible candidate for the post. "I am very happy in California," El-Erian said, referring to the Newport Beach headquarters of the world’s biggest manager of bond funds. "I have one of the best jobs in the world."

Financial RepressionInvestors should focus on economies with strong balance sheets that are growing, including Canada, Australia and a number of emerging market economies that are not going to impose what Pimco has dubbed financial repression, El-Erian said. Corporate bonds offer value in the U.S., he said. "There are lots of opportunities if you understand what game is being played," he said.

In a report aimed at establishing a worldview for investors in the next three to five years, El-Erian described financial repression yesterday as the prospect of policy makers trying to force savers to accept returns below the rate of inflation as the governments grapple with budget deficits.

A fight over taxes and the scale of U.S. spending cuts between Republicans and Democrats remain the biggest obstacles to a deficit-cutting plan that Obama administration and congressional leaders say is necessary for an agreement to raise the U.S. debt ceiling. "We’ve seen some progress toward mini bargains but not grand bargains," El-Erian said. "We don’t need to agree on every step but let’s get going before it gets worse."

What should be done with Greece? The country that gave birth to Western civilization appears increasingly likely to be the first euro sovereign to restructure its debt. It all has the potential to be a mess. Nonetheless, Europeans do have a number of options to restructure Greece’s debt.

The hard trick is to do it in a manner that allows the euro to survive and to stem any further collapse of Greece or other at-risk countries. Europe can look to a long history of debt defaults by sovereign nations for precedent. In recent times there have been debt restructurings by Argentina, Mexico, Pakistan, Uruguay and Russia, and they have largely taken two forms when voluntary.

The first form is accomplished through the voluntary participation of debt holders. The mild tonic of debt restructuring involves extending maturities and lowering interest rates on the country’s debt. The harsher brew involves exchanging debt with a lower value to those debt holders who voluntarily participate. These restructurings, like one by Uruguay in 2002, succeed because the debt, like Greece’s, is trading at such a heavy discount. New debt is offered at effectively better terms than the trading price of the current debt, thereby giving the debt holders an incentive to participate.

Greece is different though. It does not have its own currency. In addition, some 90 percent of Greek bonds are under Greek law. This allows Greece much more latitude to deal with the crisis. The Greek Parliament can simply amend Greek law to restructure the debt without the consent of the debt holders. It is for this reason that the small percentage of Greek bonds issued under English law trade at a premium. They cannot be so modified by the Greek government.

Beyond these more standard options, the nuclear one is for Greece to exit the euro for a period to allow it to devalue its currency to afford these debts. But the terms of Greece’s debt may require it to pay back this debt in euros anyway, making such a switch much harder to carry out without these other strong-arm tactics.

So what will Europe do? The European Central Bank appears adamant that debt reduction is too dangerous, while Germany has been demanding that there be pain for Greece. All agree a euro exit would be catastrophic. The managing director of the International Monetary Fund, Dominique Strauss-Kahn, was to have been the mediator among these parties, but his arrest in New York on sexual assault charges has ended his involvement.

Among all of the options, extending the maturity of Greece’s debt appears to be the most likely and politically palatable. The European Union can claim that it is still paying Greece’s obligations in full while also showing to Germany and other Northern European nations that there is pain for the bondholders.

If these debt maturities are extended a few years, the European Union would not have to cover the looming private financing gap Greece faces. In such a case, the accountants may still allow European banks that hold billions in Greek debt to still value it at 100 cents on the dollar, allowing them to avoid their own solvency issues and allow time to build up reserves. The European Central Bank can thus avoid haircuts or defaults that might affect the other troubled European countries or European banks.

But in truth a maturity extension or interest rate reduction simply postpones the problem if Greece’s debt burden is still too high. Planned Greek asset sales may be enough to remedy some of the difference, but it is unlikely that they will be sufficient for all of it. Because of this, the economist Nouriel Roubini and other hard-liners advocate an orderly restructuring and debt write-down from the get-go.

Europe is moving to adopt a legal debt-restructuring scheme for bonds issued after 2013 modeled after the I.M.F.’s own unsuccessful sovereign debt restructuring mechanism. It is at that time that Europe’s promise that no haircuts will occur on European private sovereign debt expires.

Coincidentally, this is when another more aggressive Greek restructuring may be about to occur if the Europeans start this year with a restructuring that simply extends debt maturities. But at this point the European Union and the I.M.F. will be the largest creditors of Greece, holding about 110 billion euros in Greek debt. The European Central Bank will own tens of billions more in Greek debt acquired by propping up Greek banks.

As Lee C. Buchheit and Mitu Gulati state in an excellent paper summarizing these issues, a debt restructuring in 2013 or later will mean that "the sword of a debt restructuring … will fall principally on the neck of the official sector lenders." In other words, the European Union will have to share this pain. At this point, the maturity for the European Union and private holders may again be extended. And the extension is likely to last for decades to allow the debt’s value to be eaten away by inflation.

But this is the mild case for 2013. By that time, harsher action may be necessary if any restructuring made now is not effective. In all of these cases, though, many of these holders are likely to use past experience to fight a restructuring, possibly in the courts. Who holds Greek debt is unclear. But there may be hedge funds and other professional debt arbitragers willing to take up such a battle.

These restructurings can take months to achieve when done efficiently and years when not. Choosing the right course requires a political body that remains committed and focused. Even before the arrest of Mr. Strauss-Kahn, Europeans were wavering on bailouts. It is going to be difficult for Europe’s political representatives and their public to agree on what to do and stay the course.

The European financial ministers will truly have to display nerve and ability to support their financially troubled brethren. With Greece, unfortunately, uncertainty and pain appear to be the most likely outcome. Portugal and Ireland may be next.

How long before we confront a new financial crisis? Usually a severe shock to the financial system damps risk appetite for some considerable time. Economies have to recover, bank capital has to be substantially rebuilt and debt workouts, which can take 10 years or more, have to be far advanced before trouble brews anew. However, if the core ingredients of a financial crisis are boundless optimism, excessive leverage and overpriced assets, then we are already in dangerous territory less than three years after the collapse of Lehman Brothers.

Consider the state of asset markets. Commodities remain overblown despite the setback that recently overtook silver and subsequently spread to other markets. Developed world government debt markets look seriously overpriced in the light of the slow response to spiralling fiscal deficits in the US and elsewhere. While US house prices have collapsed, those in the UK look far too high in relation to earnings.

In equities, we have a new internet bubble with shares in the likes of Facebook, LinkedIn and Renren trading on absurd multiples of revenue. As for credit markets, lending standards are falling and covenant-lite lending has staged a comeback. This is largely the work of developed world central banks, whose monetary policy response to the last crisis threatens to sow the seeds of a new crisis, just as Federal Reserve policy did in the US after the dotcom bubble burst. Meanwhile, the banks remain vulnerable. While modest progress has been made in deleveraging, the capital regime proposed by Basel III looks inadequate to anyone other than a boundless optimist and banker.

The developed world is still crippled with debt and the response to the European sovereign debt crisis has been a case of simply muddling through. As I said here a year ago at the time of the first rescue package for southern Europe, policymakers are offering a liquidity solution to a solvency problem. They continue to do so and a lack of realism has marked the handling of successive stages in this fiscal debacle, culminating in the absurd denial that the recent finance ministers’ meeting in Luxembourg was taking place.

Equally striking is the inadequate regulatory response to the last crisis. Any attempt to assess the state of the reform effort should start from the point that a disproportionate share of the burden is being carried by the increase in capital ratios. While an increase is desirable, it has the disadvantage of giving banks an added incentive to shovel business off balance sheet. While the UK is pursuing the tougher line of trying to ringfence retail banking operations, I fear politicians will be unable to resist the temptation to bail out the investment banking arms of universal banks that run into trouble.

In the US, Republican politicians seem determined to unwind the Dodd-Frank Act and ensure that the Securities and Exchange Commission and the Commodity Futures Trading Commission are deprived of the resources to carry out their duties under the new legislation. Furious lobbying by the investment banks is also eroding the thrust of the Volcker rule, which is supposed to put a stop to their own-account gambling.

Perhaps the biggest concern is the increased concentration of wholesale and investment banking business among a handful of systemically important financial institutions, including those that dominate the opaque derivatives business, parts of which are highly toxic. Moves to put more of this business through a central counterparty make sense. Yet as Peter Norman points out in a new book on this aspect of risk control, putting central counterparties into a front-line role in absorbing systemic risk raises the question of what would happen if the central counterparties themselves failed.

He quotes Patrick Pearson, head of the financial market infrastructure unit at the EU Commission, as saying that a clearing house failure could unleash "financial Armageddon".* So the too big to fail problem could be raised to another level. At the same time, the attempt to establish resolution mechanisms to permit the closure of a bank’s operations on a cross-border basis is likely to remain intractable. A paradoxical feature of all this is that while the reforms do not add up to a coherent programme, so much of the structure of banking regulation is being changed in one go that the risks in implementation remain formidable.

It is, of course, impossible to predict the timing of a financial crisis or its trigger. Yet it is disquieting that when there are so many obvious vulnerabilities in the system, there is so little left in the monetary and fiscal policy locker with which to address another financial maelstrom.

There may not be anything to be done about the sad state of the home-building industry. They built too many homes before; now they are building very few. But the numbers released on Tuesday are still a stark reminder of the weakness of a large section of the economy.

For the 12 months through April, there were 430,000 single family homes started. That figure is the lowest since the figures were first tallied in 1960, and it is down 75 percent from the peak of 1.7 million, set just five years ago.

In early 2010, there had seemed to be a little bit of a revival. The total for the 12 months ending in October 2009 was 437,100 — until now the lowest ever — but the figure rallied to 503,200 in the 12 months through May 2010. Credit has eased a bit, and there was a little optimism engendered by the temporary tax credit for home buyers.

Now we are back to setting new lows, and tight credit is not the reason. Lack of demand is.

I prefer to look at actual starts over 12-month periods rather than the seasonally adjusted annual rates that the Census Bureau emphasizes in its releases. If you want to compare one month with the next, you need seasonal adjustments, but weather often means you can’t tell what is real and what is not. Looking at 12-month totals means that some noise is eliminated at the expense of a delay in seeing trends.

The picture is not as grim in multifamily starts. There the 12-month totals are slowly rising. They are still low by historical standards, but are well above the recession lows. If fewer people own homes, more may choose to live in apartments. (The annual rate fell in February, leaped in March and fell in April. Those changes are largely related to weather and thus not worth the attention they got.)

The economy overinvested in housing during the bubble. There is no reason to invest a lot in it now. But construction workers can build other things. We underinvested in many types of infrastructure, and now would be an ideal time to use the slack in the construction industry to rectify that.

But of course we will not. Governments are cutting back. It isn’t easy to come up with money to fix schools, or build new ones, when teachers are being laid off.

For the better part of the past decade, and particularly in the last few months, the American dollar has been the 98-pound weakling of the foreign exchange world. It has lost value against almost every other global currency — not just the euro, pound and yen but even the Romanian new leu and the Latvian lats. Driven largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar, weighed against a basket of other currencies, hit a 40-year low this month.

But betting against the dollar may no longer be such a safe play — not necessarily because of any sudden macroeconomic shifts but because of a sense that the long dollar sell-off may have finally gone too far. Since May 4, the dollar is up 4 percent against the euro and 2 percent against the pound, while rallying against the Romanian and Latvian currencies as well.

The dollar’s bounce, though too brief to be called a trend, has not been driven by any noticeable improvement in America’s economic fundamentals. Indeed, the faint but real risk that Congress will fail to reach agreement on raising the legal ceiling on government borrowing only underscores the still parlous state of the American economy.

At the same time, unemployment in the United States remains stubbornly high, at 9 percent. And there is a strong belief among big money investors that the Obama administration as well as the Federal Reserve chairman, Ben S. Bernanke, tacitly welcome a cheaper dollar to spur exports and encourage American manufacturers to hire more aggressively. "The U.S. economy is still facing headwinds — from weak housing to reductions in government spending," said Ray Attrill, a currency strategist for BNP Paribas in New York. "For those reasons, we think the export sector is where policy makers are looking for growth."

But analysts also see another, more technical reason behind the dollar’s long decline — one that may well be ending. Ever since the global financial crisis began to ease in 2009, the appeal of investing in higher-yielding currencies and commodities all over the world has created what, in trader parlance, is called a risk-on, risk-off dynamic.

Investors tend to sell their safer holdings, like United States Treasury bonds, when they feel more bullish. Because 90 percent of the world’s hedge funds are dollar-based, those changes in sentiment can have a depressing effect on the American currency. Reserve-rich central banks in emerging markets have also been selling dollars and buying euros to rebalance their reserve portfolios, said Mr. Attrill, citing recent data from the International Monetary Fund.

"Everything has been strengthening against the dollar — this is something that has not happened in the past," said Stephen L. Jen, an independent currency strategist and former economist for the International Monetary Fund.

But that momentum now appears to have swung too far to one side — particularly as Europe’s own debt problems return to the limelight. Mr. Jen sees the euro’s rise to a high of $1.49 from $1.19 over the last year as overdone, especially in light of the festering problems in Greece and other weak euro zone economies. Even now, the euro is back down to $1.42. "With its sovereign debt issue and the growth differential in the euro zone," Mr. Jen said, the euro is "just too expensive."

Other analysts also have begun to say enough already. In part, that is because much of the dollar’s recent weakness was driven by the perception that the European Central Bank, and to a lesser extent the Bank of England, were more likely to raise interest rates to keep inflation under control than was the Federal Reserve, which remains committed to keeping short-term interest rates near zero. With rates likely to be higher in Europe than in the United States, traders moved their money out of United States government bills and bonds to gain greater returns abroad.

But the stronger the euro got, the more likely it became that its rise would begin to bite back. As the euro rose to nearly $1.50, the strength of the currency started to raise doubts about whether the mighty German export machine, which gained competitive strength when the euro was weaker, could continue to perform so successfully around the world.

Meanwhile, with growth negligible or nonexistent in Greece, Ireland, Portugal and Spain, and with each of them facing huge challenges paying their debts, Europe’s position looks more precarious — especially if the European Central Bank remains determined to push interest rates higher this year.

"The beleaguered European periphery is now choking on a caustic concoction of a surging euro exchange rate, a deflating E.C.B. balance sheet and rising short-term funding rates," Michael T. Darda, chief economist of MKM Partners, wrote in a recent note to clients. "If there is no path to a reasonable recovery in nominal G.D.P. for the European periphery, fiscal austerity will fail and serial defaults and/or restructurings likely will follow," he wrote.

Just as puzzling to some has been the robust performance of the British pound over the past year — up 11 percent against the dollar. On the surface, the raw economic numbers in Britain are as bad as anywhere in Europe: a deficit of 10 percent of gross domestic product, a weak banking sector and sluggish economic growth that continues to be revised downward. As Paul De Grauwe, a Brussels-based economist noted recently, Britain’s 10-year bond yields are 2 percent below those of Spain, despite Spain’s having lower debt and deficit figures.

But Britain has the benefit of running its own monetary policy. And its status apart from the United States dollar and outside the euro zone has attracted foreign bond investors seeking a haven. To British officials, such a trend reflects its ambitious program to cut government spending and bring down the deficit. But a recent report on the British economy by Morgan Stanley strikes a more skeptical tone, highlighting six problem areas that could cause investors to take flight.

Morgan Stanley cites the effect on growth that public sector cuts will have, the continued vulnerability of the country’s banks to a weakening real estate market and increased tensions between the Conservatives and the Liberal Democrats in the coalition government. The upshot is that "the pound could be in for a pounding," the analysts conclude.

Predicting a currency’s direction is about as inexact as sciences come, especially in today’s volatile markets. But one thing seems certain: the dollar may no longer be king, but after a long slump it can still flex its muscles from time to time.

After suffering sharp losses in May due to bearish dollar bets, New York-based hedge fund FX Concepts has scaled back that position-and is more optimistically eying prospects for a withered U.S. currency. Perhaps the most high-profile of any currency hedge fund, New York-based FX Concepts specializes in investment strategies in currencies, fixed income and commodities and has just under $9 billion under management. The firm's flagship Global Currency Program is down 5% in May, in large part because that fund's anti-dollar bias was too severe.

Scott Ainsbury, a senior portfolio manager at the fund, said any potential lasting dollar rally seemed unlikely before last week. But now, he said the firm is rethinking that position and adjusting the fund accordingly. "We've cut our dollar shorts position substantially," Ainsbury said, adding "there are maybe some indications that [this rally is] going to be a little bit longer lasting."

The foreign-exchange market had routed the stimulus-burdened dollar all year--until last week. Until this week's modest bounceback, the euro had fallen roughly 5% against the dollar since May 4. The U.S. currency rose as the euro was battered by reduced European Central Bank rate-hike expectations and a resurfacing of euro-zone debt woes, exemplified by a possible restructuring of Greece's bailout. The euro lost favor just as investors were significantly positioned against the dollar, having built the largest net short position since January 2007 as of May 3, according to Commodity Futures Trading Commission data.

But like Ainsbury's fund, market participants now are increasingly skittish about writing off the dollar and are unwinding those negative bets. "It wasn't great," said Ainsbury, about last week, noting the firm's losses by being caught short the dollar. Because the firm is a "big boat" and it takes awhile to steer strategy, the firm had to scramble to adjust positions for a potentially changed dollar landscape. He noted many scenarios under which the U.S. currency could rally, perhaps well into this summer.

Last week's sharp selloff in commodities could point to a growing investor concern that global growth may be slowing, said Ainsbury. That could potentially lift the dollar versus growth-based currencies. A recent round of soft U.S. data also may ironically help the U.S. currency as well: less U.S. growth, less global growth and less for growth-centric currencies.

Ainsbury also said FX Concepts recently decided to short the euro, betting against the single currency's prospects, versus the yen specifically. The negative euro sentiment is broader than just concerns over a possible Greece debt restructuring, he said. "Germany is doing great, while the rest of the euro zone--like in the southern countries--it is imploding," he said.

Also, "you probably don't want to be fully levered up," on playing the yen against the dollar and push it below Y80, but Ainsbury's fund still likes the direction of that trade generally. Pushing the currency pair below Y80 tempts intervention into currency markets by Japanese officials. But yen is still strong because of an underlying account surplus--and that has not changed because of the devastating March tsunami and earthquake.

On Monday, the government reached the debt ceiling, and the Treasury Department immediately implemented measures to appropriate federal pension fund payments to use for government spending. This step in pulling from government held retirement funds is once again bringing up the potential for the Obama administration to seek acquisition of the public's 401K's to help pay for spending and debt.

On May 16th, the Obama administration agreed to tap into federal retirement programs to help fund programs and agencies that would otherwise be funded through borrowing before the debt ceiling was reached.

The Obama administration will begin to tap federal retiree programs to help fund operations after the government lost its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt. Treasury Secretary Timothy F. Geithner has warned for months that the government would soon hit the $14.3 trillion debt ceiling — a legal limit on how much it can borrow. With that limit reached Monday, Geithner is undertaking special measures in an effort to postpone the day when he will no longer have enough funds to pay all of the government’s bills. – Washington Post

The use of retirement and pension funds as the first resort of the government to pay for programs, debt obligations, and even ongoing military operations is a large warning signal to the American people regarding a huge and untapped resource that up until now, the government has refrained from exploiting. The amount of money stored in corporate retirement funds, federal retirements, and market based 401K's amount to several trillion dollars that unlike Social Security, which it is collateralized by IOU's, this is real money that the government has already sought to acquire in budgetary discussions.

The plan, as sketched in the 43-page document, calls for the creation of something called "Guaranteed Retirement Accounts" (GRAs). Biden slyly shifts the onus for the idea through weasel words typical of the federal government: "Some have suggested the creation of Guaranteed Retirement Accounts (GRAs), which would give workers a simple way to invest a portion of their retirement savings in an account that was free of inflation and market risk, and in some versions under discussion, would guarantee a specified real return above the rate of inflation."

These accounts would be "free of inflation and market risk" because they would be under the direct and absolute control of the federal bureaucracy. There would be no risk because the funds would no longer be moored to the free market and subject to the fluctuations thereof. Rather, the retirement funds of every hard-working American dependent on a 401(k) for their retirement security would be nationalized and made subject to the whims and will of the executive branch. – New American (May 2010)

The track record of the Federal government towards retirement accounts us not very good. Over $3 Trillion dollars has been removed from the Social Security trust, and spent by the government under general budget spending. The money that was taken out of Americans paychecks each month to be used for retirement was instead replaced by Treasuries that are now on the brink of default. With the Treasury Departments use of Federal pension funds now to pay for budgetary obligations because the government can no longer borrow money, the next viable step is the acquisition of private retirements and 401K's.

And as noted from the 43-page document already created last year, this is not a plan regarded as a contingency, but instead as one that is intended to be implemented in the future. The US government has failed in its opportunities over the past decade to cut spending, and slow down on its debt borrowing. Now that the rubicon has been crossed regarding the debt ceiling, and the Treasury Department accessing federal retirement funds to pay for general obligations, how soon before the government has no choice but to access the trillions of dollars available in the market, and give the American people another 'promise' that they can take care of your money and retirement future.

Workers will be limited in tapping their 401(k) retirement plans for loans under legislation two senators plan to introduce today that’s designed to counter the erosion of retirement assets. "During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy day funds," Senator Herb Kohl, a Wisconsin Democrat, said in a statement obtained by Bloomberg News. "A 401(k) savings account should not be used as a piggy bank for revolving loans."

Kohl, 76, who’s chairman of the Senate Special Committee on Aging, plans to introduce the "SEAL 401(k) Savings Act" with Senator Mike Enzi, 67, a Wyoming Republican. The bill would reduce the number of loans workers may take from a 401(k) and give participants more time to repay after losing a job. It will allow savers to contribute to their plan after taking a hardship withdrawal and ban debit cards linked to the accounts, according to Joe Bonfiglio, a spokesman for Kohl’s aging committee.

The Senate bill would limit the number of outstanding loans for each participant to three, Bonfiglio said. Employers would have the option to reduce the number for their plans. There is no rule right now limiting the number of loans workers may take and it varies by company, Bonfiglio said.

Leaving a JobAlmost 28 percent of participants in 401(k)-type accounts had an outstanding loan at the end of 2010, which is a record, according to a study released today by benefits consultant Aon Hewitt, a unit of Chicago-based Aon Corp. The average outstanding loan balance was $7,860 and 58 percent of plans permit participants to have two or more loans at a time, said Aon Hewitt, which used a database of about 2 million employees in 110 plans.

"The big risk with loans is that participants leave their job," said Alison Borland, head of retirement strategy for Aon Hewitt. Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland, who’s based in Nashville, Tennessee. Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may add to the burden of a jobless worker.

Depending on the rules of an employer’s 401(k) plan, workers generally may borrow from their retirement account for any reason and pay the loan back with interest. About 89 percent of participants were in plans offering loans in 2009, according to the Washington-based Employee Benefit Research Institute, which has a database of 21 million 401(k) savers.

Payroll DeductionsWorkers generally may borrow as much as 50 percent of their vested account balance up to a maximum of $50,000, according to the Internal Revenue Service. The loan must be repaid within five years, unless the money was used to buy a primary home.

Employees can repay the loan through payroll deductions and can continue to make contributions to their retirement accounts, Borland said. More than 80 percent of those with a loan do continue to save, she said. "For these workers who take a loan, repay it and continue to save, they haven’t done significant damage to their retirement prospects," Borland said. "They are at significant risk if they change jobs or lose their job."

The average interest rate on loans from 401(k) plans is the prime rate plus 1 percent, currently 4.25 percent, David Wray, president of the Profit Sharing/401k Council of America, said in an e-mail. The median loan origination fee in 401(k) plans is $75 and the median annual loan maintenance fee is $25, according to the council, a Chicago-based non-profit association of employers that sponsor retirement plans.

Tax PenaltyFor workers who lose their jobs before repaying a loan, the bill would let them pay down their balances into an individual retirement account before filing their taxes for that year. That way the saver doesn’t incur a withdrawal tax penalty on those funds, Bonfiglio said. The IRS and Treasury Department would need to issue guidance on how the process will work, he said. About $663 million of 401(k) loans in 2008 were deemed taxable distributions, according to a December report by the Department of Labor.

The flexibility to take loans or withdrawals is an attractive feature of the accounts for some participants, said Sarah Holden, senior director of retirement and investor research for the Investment Company Institute, a mutual-fund trade group based in Washington. "Knowing that you can borrow the money if you need to frees people to participate in the plan and contribute more," she said.

Hardship WithdrawalsA 401(k) plan’s terms also may let individuals take a hardship withdrawal that doesn’t have to be repaid if they demonstrate a financial need such as medical or funeral expenses. That money generally is included in an employee’s income for tax purposes and may trigger an additional 10 percent tax penalty, according to the IRS. Employees also are generally prohibited from making contributions to their account for at least six months after taking the withdrawal, the IRS said.

The legislation would allow participants to continue to contribute during the six months following a hardship withdrawal because the loss of employee and company matching contributions during that period can further erode retirement savings, according to Kohl’s statement. Kohl said on May 13 that he won’t seek re-election next year. The bill also would ban products that promote so-called leakage of savings including 401(k) debit cards, which may carry high fees, Bonfiglio said. While use of 401(k)debit cards is not widespread, they have been offered by companies in the past, he said. Using the card essentially triggers a loan.

Detroit's General Retirement System will allow the city to spread a five-year pension fund payment over seven years, saving the city about $13 million, Detroit Mayor Dave Bing said today. The mayor hopes that the police and fire pension fund will follow suit. That would bring the city's savings to $65 million.

Bing included a $65 million pension-related spending reduction in his fiscal 2012 budget, but that cut would have come from the suspension of a payment the city is required to make to the funds. "The mayor made this drastic and legally questionable proposal prior to any discussions with the pension board trustees to determine if they were amenable to such a scenario or to determine if they had alternate suggestions that would result in savings to the city," Detroit City Council member Saunteel Jenkins wrote in a statement. Jenkins is the council's representative on the General Retirement System board.

"As a council member and trustee for the General Retirement System, I felt it was imperative to make sure the pension systems were a part of the budget dialogue," she said. "City Council held two meetings with the pension trustees to solicit its recommendations for savings to the city. As a result, both pension systems agreed to consider alternatives to the mayor's budget proposal that would net the same level of savings."

City Finance Director Tom Lijana said the extended payment, called "smoothing," would negate the need to suspend the annual payment. Smoothing is a method commonly used by public employee retirement plans, Susan Glaser, chairwoman of the General Retirement System, wrote in a statement.

The General Retirement System "has adopted a smoothing method which utilizes a period of years to recognize gains and losses, as opposed to recognizing gains and losses in one year," Glaser wrote. "The board of trustees of the General Retirement System of the city of Detroit, after consultation with its actuary, Gabriel Roeder Smith & Co., voted today to change its smoothing period to seven years from its current five-year period."

Within the past year, Glaser wrote, the board had increased the smoothing period to five years from three. Both, she wrote, "are within actuarial standards and in no way jeopardize the stability of the fund. … The action we took yesterday both protects the interests of the retirement system's members and beneficiaries and assists the city in addressing its ongoing financial challenges."

Bing is also asking the city's labor unions to agree to a reduction in medical costs and pension benefits and has set a Sept. 1 deadline for achieving those measures. The mayor has warned that the state will send an emergency manager to Detroit if the concessions aren't made. But today Bing said that if the unions drag out negotiations, he'll make cuts to the workforce.

California's largest public employee pension fund on Wednesday cut $170 million from the amount the state must pay in the next year toward retirement benefits, mostly because new union contracts shift some of the costs to state workers. The new labor pacts have employees contribute more to their pensions. The cost savings from that and slower-than-expected salary growth would have been larger, but the California Public Employees' Retirement System is still absorbing the effects of billions of dollars in investment losses from the recession.

The change would trim the state's contribution from $3.7 billion for the budget year that ends June 30 to $3.5 billion for the 2011-12 fiscal year. That's still more than the state was paying before the market fell; CalPERS has regained much of the share value in lost in 2008, but those gains will be folded into financial models over several years, just as the losses were.

The reduction reflects new state worker contracts that boosted the amount union workers pay by anywhere from 2 percent to 5 percent of their salary. Most of the state's 21 labor contracts were renegotiated last year, with Gov. Jerry Brown signing the last six contracts on Monday. The state's payment this year was reduced by about $300 million from the previous year. "State employees are expected to contribute $1.3 billion next year to help fund their retirement benefits -- more than one-third of the state's contribution," said George Diehr, chair of the CalPERS benefits and program administration committee, which recommended the changes Tuesday.

The change comes amid debate about public employee pensions in California and across the nation. Critics say the pension funds guarantee a level of benefits to retirees that's richer than most workers can expect. But they say the pensions aren't adequately funded and potentially leave taxpayers on the hook for shortfalls. Backers say they provide modest retirement security for most government retirees, using money they earned throughout their employment.

Brown has proposed some pension changes to prevent abuses and cut costs as he tries to close a $10.8 billion budget deficit, but Republican lawmakers are pushing for much more sweeping changes, such as freezing benefits and shifting to a hybrid retirement system that works more like a 401(k) investment account. CalPERS has more than $235 billion in assets, making it the largest U.S. public pension fund. It oversees pension benefits for more than 1.6 million state and local government workers and retirees, and their families.

Meredith Whitney, the outspoken Wall Street analyst, who predicted a wave of defaults by troubled US municipalities, has warned that the rising cost of states’ retirement schemes could redirect funds away from public services and ultimately hurt the US economy.

Ms Whitney, who shot to fame for spotting trouble at large Wall Street banks ahead of the financial crisis, forecast "state arbitrage" whereby the weakest states, namely California, Illinois, Ohio and New Jersey, face the risk of large emigration of their highest tax base – companies and high net worth individuals – to stronger states that have better managed their finances over the years. "When states start to cut essential state services [corporations and individuals in high tax brackets] say, ‘I can take or leave it,’ and you are potentially left with a constituency that contributes less to the tax base and takes more from social services," Ms Whitney told the Financial Times.

The research does not draw a direct link between unfunded retirement benefits and defaults. Ms Whitney said her highly publicised comments about hundreds of billions of dollars of municipal defaults were an "approximation for the current cycle". She added that her latest research was a "macroeconomic analysis that should be a guidepost to how the economy is going to look on a regional and state basis in the next 10 to 15 years".

Ms Whitney believes that states have $1,800bn in total debt obligations. Some $1,300bn of that amount is "off-balance sheet debt" from pension obligations and other retirement benefits that states have promised but failed to set aside sufficient money to fund. While the 77-page report relies on public data provided by the states, it could court more controversy because many municipal experts have argued that concern over pensions is overblown and that most states have time to address underfunding with reforms, which they are already rolling out.

Her estimates include healthcare and other non-pension benefits that states largely do not set aside money for now, and that do not generally carry the same legal obligation as public bonds or pensions. The research concludes that state debt has surged over the past decade as states have subsidised budgets by not adequately funding retirement pledges as well as selling bonds and benefiting from federal transfers. The report estimates that about $1,000bn of spending over the past decade came from not adequately funding pensions.

Unique accounting has understated retirement benefits for years, the report says. States can value these liabilities based on return assumptions, typically an optimistic eight per cent, and "smooth" gains and losses over a number of years. The research concludes that states may face "large upward revisions" to total indebtedness and greater demands to fund retirement schemes amid heightened scrutiny from regulators and lawmakers. Some analysts estimate pension gaps alone could total $2,500bn with more conservative estimates on future returns.

There's probably no better person to assess the state of this economy than Richard Koo, the Nomura economist whose book The Holy Grail Of Macroeconomics is all about the unique nature of a post-crisis, deleveraging, balance sheet recession. So when he speaks out on QE2, it's a must read.

The first key points from his new report are encapsulated in this chart, which confirms that QE2 has had no positive impact on the money supply. There's simply no connection. The world is NOT awash in cash.

Image: Nomura

So in light of that, what has QE2 done?

When the Fed buys a specific asset (in this case, longer-term Treasury securities), the price of that asset rises. That prompts private investors to re-direct their funds to other assets, which leads to a corresponding increase in the price of those assets.

And thus the impact on other markets:

The only remaining destinations for these funds were equities, commodities, and real estate. Real estate had just been through a bubble and remained characterized by heavy uncertainty. In commercial real estate, for example, banks—at the request of US authorities—are engaging in a policy of “pretend and extend” and offering loans to borrowers whose debt they would never roll over under ordinary circumstances. That means that current prices do not accurately reflect true market prices. Housing prices, meanwhile, resumed falling late in 2010.

UK house prices have been falling since mid-2010, and the Halifax House Price Index dropped 1.4% in April 2011 alone (the decline was 3.7% on a y-y basis).

The only remaining options for private-sector investors have been stocks and commodities. That, in my opinion, is why both markets have surged since the announcement of QE2.

His conclusion: QE2 was a huge gamble, and the end of these bubbles could exacerbate the great recession

Goldman Sachs Group Inc., Deutsche Bank AG and JPMorgan Chase & Co., which bundled and sold billions of dollars of mortgage loans, now want to help investors bet on people’s deaths.

Pension funds sitting on more than $23 trillion of assets are buying insurance against the risk their members live longer than expected. Banks are looking to earn fees from packaging that risk into bonds and other securities to sell to investors. The hard part: Finding buyers willing to take the other side of bets that may take 20 years or more to play out.

"Banks are increasingly looking to offer derivative solutions," said Nardeep Sangha, 43, chief executive officer of Abbey Life Assurance Co., a London-based Deutsche Bank unit that helps pension funds manage the risk of retirees living longer than expected. "Making the long maturity of the risks palatable for investors, including sovereign wealth funds, private-equity firms and specialist funds, is the challenge."

As insurers reach the limit of how much pension-fund liability they’re willing to shoulder, companies such as JPMorgan and Prudential Plc last year set up a trade group aimed at establishing and standardizing a secondary market for so- called longevity risks. They’re also developing indexes that measure mortality rates and securities to let pension funds pay fixed premiums to investors in return for coverage against major deviations from projections. Swiss Reinsurance Co., the second-biggest reinsurer, sold the world’s first longevity bond in December in what it called a "test case" to sell risk to the capital markets.

‘Run Dry’Goldman Sachs, based in New York, and Deutsche Bank in Frankfurt have set up insurance companies that promise to pay pensions if retirees live beyond a certain age. They typically receive a portion of the pension plan’s assets in return. The banks, along with Morgan Stanley, Credit Suisse Group AG and UBS AG, are looking for ways to offer this risk to investors. "Ultimately, reinsurance capacity for longevity risks will run dry, and that’s why it’s imperative that as the market grows and develops it is able to bring in new types of risk-takers," Sangha said. "The obvious channel is the capital markets."

Medical advances and healthier lifestyles have made predicting life spans more difficult for pension funds. Life expectancy in the U.K. is increasing by one to three months every year, according to Dutch insurer Aegon NV. (AGN) Every year of additional life expectancy typically adds as much as 4 percent to future pension requirements, Aegon said in a report in March. Aegon reported last week that first-quarter profit fell 12 percent as the company set aside money to cover the risk of policyholders in the Netherlands living longer than expected.

Pension funds can hedge against life-expectancy risk by transferring assets to an insurer or other counterparty that promises to pay some or all of the future liabilities. Last year, GlaxoSmithKline Plc (GSK), the U.K.’s biggest drugmaker, became the 10th FTSE 100 firm to buy insurance on about 900 million pounds ($1.5 billion), or 15 percent, of its U.K. obligations. That means Prudential, the U.K.’s largest insurer, rather than the pension fund, will pay some GlaxoSmithKline pensioners should they live longer than expected. Most longevity risk transferred from pension funds is held by insurers.

Regulators are just beginning to focus on the new products. "We’re seeing more and more sophisticated mechanisms being offered," said Bill Galvin, CEO of the U.K.’s Pensions Regulator. "From a regulatory perspective, we are concerned to ensure that trustees understand the extent to which longevity risk has been passed from their scheme and the precise shape of any residual risk."

‘Early Days’The Frankfurt-based European Insurance & Occupational Pensions Authority isn’t reviewing longevity transfers, said Sybille Reitz, a spokeswoman for the organization, because "the market is still in its early days." The U.K. is the world’s biggest market for insuring pension liabilities after a change in accounting rules in 2004 forced companies to include pension plans on their balance sheets, increasing the volatility of earnings. Since then, 30 billion pounds of liabilities have been insured, about 3 percent of the total outstanding, according to estimates by Hymans Robertson LLP., a London-based pension consultant.

Banks and insurers completed a record 8.2 billion pounds in longevity-risk transfers last year. Goldman Sachs-owned Rothesay Life Ltd. sold the most pension-plan insurance in 2010, while Deutsche Bank’s Abbey Life completed the biggest swaps deal.

With $17 trillion of the $23 trillion in pension-fund assets worldwide exposed to longevity risks, according to Zurich-based Swiss Re, investment banks see this as an opportunity to create a new market for those willing to bet on life-expectancy rates. If pensioners die sooner than expected, investors profit. If they live longer, investors must compensate the pension fund for the additional costs it faces.

Investors may be attracted to such bets because longevity trends aren’t linked to movements in equities, bonds or commodity markets, said David Blake, director of the pensions institute at Cass Business School in London, who has worked with JPMorgan on the derivatives. The complexity and risk involved in longevity assets with timelines of more than 20 years means banks are looking to create bonds that offer 5 percent to 9 percent in annual returns, according to Guy Coughlan, former head of longevity structuring at JPMorgan. Returns as high as the "mid-teens" are possible, he said.

‘Structural Problems’Investors remain unconvinced. Not knowing whether a bet on a group of pensioners’ life spans is correct for decades prevents hedge funds such as London-based Leadenhall Capital Partners LLP from entering the marketplace.

"There are big structural problems with the longevity market," said Luca Albertini, CEO of Leadenhall, which has $120 million under management and invests in insurance-linked securities such as catastrophe bonds used to help cover hurricanes and other extreme risks. With clients able to withdraw investments only every month or quarter, "the only way I can invest is if the market is truly liquid," he said. "No one has proven that to me yet."

Subprime mortgages sold in the past decade were the genesis of the biggest financial meltdown since the Great Depression. Investment banks passed the risk of borrowers defaulting to the capital markets by packaging, or securitizing, the loans into bonds and selling them to investors and one another.

‘Fully Collateralized’Collateralized debt obligations were created and sold in such volume that when mortgage holders defaulted, governments in the U.S. and Europe had to bail out the financial system. Banks are now looking to investors in much the same way to securitize the risk of pensioners living longer than expected. Securities based on life expectancy don’t hold the same risks as those linked to subprime mortgages because they are "fully collateralized," minimizing the risk from a counterparty failing to meet its obligations, Coughlan said.

Cass Business School’s Blake said it’s unfair to compare the securitization of mortality expectations to the subprime- mortgage market. "Subprime was highly leveraged," Blake said. "This is different."

Still, longevity transfers expose investors to the credit risk of issuers for many years. Once a pension fund agrees to transfer its assets in return for protection against pensioners living longer than expected, they are tied into a long-term contract that can be difficult to unwind, said David McCourt, senior policy adviser at the U.K.’s National Association of Pension Funds. That means the insurer, bank or hedge fund that a pension plan chooses to deal with is important, he said.

"There’s a massive counterparty risk," McCourt said. "People say insurance companies don’t go bust, but they do. We’ve seen AIG and investment banks going under like Lehman. There’s a lot of pressure on the trustees to make sure they’re comfortable the deal is right because there’s no going back."

Pension funds outside the U.K. also remain hesitant. APG Algemene Pensioen Groep NV in Amsterdam, which manages 277 billion euros ($396 billion) of assets for seven pension funds, "will not do transactions to actively hedge longevity risk," according to Harmen Geers, a spokesman for the firm. "The market is unbalanced, since there are no natural counterparties to take up a risk of that size in absolute terms," Geers said.

Life SettlementsThere has been less interest in the U.S. because regulatory pressure on pension funds hasn’t been as intense as in the U.K., said Pretty Sagoo, director of structuring at Deutsche Bank in London. In the U.S., investors can bet instead on life expectancy through so-called life settlements. Rather than exchanging assets and liabilities with a pension plan, the life-settlement market allows investors to buy insurance policies from individuals and pay the premiums until that person dies. Investors then receive the death benefits.

The secondary market for U.S. life settlements began in the 1980s when the AIDS epidemic led some patients to sell their insurance policies to pay for treatment. The industry was valued at $2 billion in 2001 and, once it became regulated, quickly grew to a maturity value of $35 billion by 2009, according to Conning & Co., a Hartford, Connecticut-based research firm.

Goldman Sachs-owned Rothesay Life, started in 2007, was the biggest pension liability insurer in the U.K. last year after insuring 1.3 billion pounds of liabilities from the British Airways Plc pension plan. The largest swaps deal was completed between Deutsche Bank’s Abbey Life unit and Bayerische Motoren Werke AG’s U.K. pension plan.

Q-Forward SwapsRothesay Life CEO Addy Loudiadis was the architect of a Goldman Sachs deal in 2001 that allowed Greece to mask its indebtedness, according to London-based Risk magazine. Goldman Sachs isn’t part of the new industry group, the London-based Life & Longevity Markets Association, preferring to develop the market alone, according to Tom Pearce, managing director of Rothesay Life. Pearce said it won’t be easy trading a security linked to life expectancy.

"Clearly, if there was a capital market solution that would be helpful for the market generally, but there are some challenges," he said. "The biggest challenge is selling these very long-term risks to shorter-dated investors."

Mortality IndexesUnlike Deutsche Bank and Goldman Sachs, New York-based JPMorgan doesn’t carry any of the risk of pensioners living longer than expected. Instead, it arranges swaps, called q- Forwards, which allow a pension fund to pay a fixed premium to a counterparty based on its members living to a specified age. If members live longer than expected, the counterparty reimburses the fund; if they die sooner, the counterparty profits.

Credit Suisse and JPMorgan have developed indexes that measure mortality rates and life expectancy for the U.S., Germany, the Netherlands, England and Wales. The indexes act as a basis for pricing individual swaps and bonds, according to Cass Business School’s Blake, who helped develop them with JPMorgan in 2007. They will help buyers and sellers price derivatives more accurately and give them confidence to trade them, creating a liquid market, Blake said.

Swiss Re sold the world’s first longevity bond in December, passing the risk from its own balance sheet to investors. The $50 million bond, named Kortis, was a "test case," said Alison McKie, head of life and health products at the firm. The bond pays investors a fixed sum from reinsurers for taking the risk that people live longer than projected. If there is a large divergence in mortality improvements between British men aged 75 to 85 and U.S. males aged 55 to 65, investors risk losing some or all of their money, Swiss Re said in December. The bond is rated BB+ by Standard & Poor’s.

Previously, Paris-based BNP Paribas SA and the European Investment Bank, the European Union’s financing institution in Luxembourg, created a longevity bond in 2004. A year later they withdrew the notes, which had a maturity of 25 years, after they didn’t find a buyer.

Munich Re, the world’s biggest reinsurer, hasn’t participated in longevity transfers "as the deals we’ve seen haven’t met our profitability requirements," said Joachim Wenning, the management board member responsible for life reinsurance. "The future longevity trend is not easy to predict. If your assumptions are wrong, the cost is high." Nevertheless, the Munich-based reinsurer recently became the 12th member of the Life & Longevity Markets Association.

Perhaps Wall Street has simply resigned itself to not caring what the public thinks. It is working to develop a new product sure to anger its critics: death derivatives. They sound just like what they are: investors would essentially bet that people will die sooner than later. This idea certainly sounds morbid at best and morally repugnant at worst. Essentially, those investors would profit from untimely death. Is it wrong for banks to create such products?

What's a Death Derivative?First, a little more explanation is warranted here. The investor side of the bet has already been described. On the other side of the transaction would be pension funds that worry their clients are going to live longer than anticipated and consequently collect more payments than their accrued balance would provide for. If the people in question die quickly, then investors get paid. If people live longer, then the pension funds are covered. Think of death derivatives as a way for pension funds to hedge against their clients living a very long time.

I actually had an idea similar to this, but broader, more involved, and with greater profit potential, about six years ago when I was working in finance.* I didn't pursue it, however, because I wasn't sure the market was ripe yet and thought public outrage would be significant. Apparently, Wall Street must believe the time is right and is prepared to endure any outrage. Oliver Suess, Carolyn Bandel and Kevin Crowley at Bloomberg report that this new market is forming. Its size could be enormous: $23 trillion of assets are in pension funds. The trouble, however, is finding investors to take on this risk.

Here's one part of the solution: As insurers reach the limit of how much pension-fund liability they're willing to shoulder, companies such as JPMorgan and Prudential Plc (PRU) last year set up a trade group aimed at establishing and standardizing a secondary market for so- called longevity risks. They're also developing indexes that measure mortality rates and securities to let pension funds pay fixed premiums to investors in return for coverage against major deviations from projections.

Ah, "longevity risks." That certainly sounds a lot nicer than "the risk of people living too long." At any rate, these measures would begin to help investors to better understand how to think about the risk that death derivatives would contain. The plot thickens as the article continues. It turns out that the mechanism that these death derivatives are best compared to is the synthetic collateralized debt obligation. Yes, the same derivatives-based asset-backed security that played a part in the financial crisis. Perhaps Wall Street figures that if it's going to go down the death derivatives road, it might as well utilize a product that many people claim is dangerous and impossible to legitimately analyze.

How They'd WorkHere's how the market would work. Let's say Anywhere County Sheriff's Pension Fund wants to hedge the longevity of its retirees. They hire an investment bank to sell a death derivative to investors who want to bet that those retirees will die sooner than some given life expectancy (think of it as the "break even price"). Let's say that's an average age of 75 years old. It would also have a term, let's say 20 years. Also, the average initial age of retirees in the reference pool is 70 years old.

It's hard to explain how this works for a big pool of retirees, so let's simplify it to a single person. You'd just aggregate from there. Let's say the derivative is struck when the person is 70. Each month/quarter/year/whatever the investors pay a premium to the pension fund to cover the person's pension distribution. Here are the scenarios:

If the person lives to be 90 or older, then the investor paid their pension and gets nothing in return. This is great news for the pension fund.

If the person lives to be 75, then the investors paid for five years, but they get a lump sum payment from the pension fund approximately equal to what they had paid over those five years. This is break-even.

If the person lives to be 80, then the investors take a loss, as the lump sum is less than what they had paid for 10 years.

If the person lives to be 72, the investors have a gain, because the lump sum is larger than the amount paid for two years.

You get the idea. Now let's think about this potential new market.

What Investors Might Buy?First of all, what investors might be interested in these derivatives? Will the market be purely speculative? In other words, is there any sort of investor that could have a legitimate reason to hedge longevity? There sort of could be. One example could be big pharmaceutical company investors. If the pharmaceutical company is doing well, then it has probably developed drugs that will prolong the lifespan of Americans. Its success is correlated to longevity. If it is having trouble developing potent new drugs, however, then life expectancy will fail to rise. In that case, death derivatives could provide a good hedge for these firms' equity.

In general, any industry aimed at the elderly will be better off if people life longer. So these death derivatives could serve as a reasonable hedge for any investors who own shares in such firms.

New Sorts of Insider Trading ConcernsHow might an insider tip work in the death derivatives market? Imagine that you're a medical researcher, and you just learned that there will be shortage of the flu vaccine. That likely means many elderly people's lives could be threatened. Suddenly, you can profit on having this information by purchasing death derivatives. Of course, chances are that these derivatives will only be purchased by large, institutional investors. The Securities and Exchange Commission just has to make sure none of those investors have close relatives in the medical industry who might be privy to knowing this sort of information before the public does.

Is This Really So Morally Questionable?Finally, there's the moral question. In a sense investors in death derivatives would cheer on the grim reaper's speedy arrival. Are death derivatives just plain wrong? Some people might say so, but there are a few reasons why they might not be so bad.

For starters, there are already industries that profit from death. Think about the casket industry. It will certainly slow down if a cure for cancer is suddenly found. We generally don't find it morally problematic that there's a death industry. But is that different from betting on someone's suffering for pure financial gain? The death industry, as it is today, provides some product or service to the deceased or their families. Death derivative investors would provide no such benefit, though they would potentially help more more pensions to survive.

Perhaps this does make death derivatives different, but the idea that investors could be benefiting through human suffering isn't entirely new. Take, for example, bets against the mortgage market by some investors towards the end of the housing bubble. These investors believed that home prices would decline and foreclosures would soar. Those outcomes aren't quite death, but they're certainly terrible for those homeowners. Of course, the same people who might find death derivatives morally repugnant might also find shorting housing market nearly as bad.

Of course, that might not stop Wall Street and investors from trying to make these securities work. If there is a market for death derivatives and they can find mechanisms that create a robust, liquid market, then it could thrive.

Deficit reduction talks involving a bipartisan group of senators are in danger of collapsing, setting back hopes that they could catalyse a compromise on long-term fiscal policy and increasing the US debt limit. The so-called "gang of six" – three Republicans and three Democrats – have been discussing a long-term debt reduction plan since the beginning of the year, in an ambitious effort to craft a deal palatable to both sides.

However, it emerged on Tuesday that Tom Coburn, the Republican senator from Oklahoma and a member of the group, was dropping out of the negotiations, at least for now. "He is disappointed the group has not been able to bridge the gap between what needs to happen and what senators will support. He has decided to take a break from the talks," Mr Coburn’s spokesman told reporters. However, his exit did not cause the group to fall apart entirely and talks among the remaining five members were expected to continue on Wednesday.

The impasse in the Senate came a day after the US reached its $14,300bn debt limit because Congress has been unable to reach agreement on fiscal matters. If that borrowing authority is not increased by early August, America faces a potentially devastating default on its debt, so lawmakers and the White House are under strong pressure to narrow their differences. The debt ceiling negotiations are occurring in a different setting, under the stewardship of Joe Biden, vice-president. However, the "gang of six" is considered an important source of momentum towards a bipartisan solution on long-term deficit reduction.

Speaking in New York on Tuesday, Tim Geithner, treasury secretary, said that lawmakers still had to lift the debt ceiling even if they did not reach a fiscal agreement. "It is simply not an option for Congress to evade the basic responsibility to protect America’s creditworthiness," he said. With Republicans demanding large spending cuts and budget reforms in exchange for an increase in the debt limit, Mr Geithner said the White House was aiming for a "substantial downpayment of specific cuts and programme reforms" in the talks.

This should affect all parts of the federal budget, from Medicare and Medicaid to the defence budget, and taxation, Mr Geithner said. But the kinds of reforms to government healthcare being contemplated by the White House are very different to the privatised overhaul for the elderly being proposed by Republicans, who are also reluctant to attack the defence budget and consider tax increases, leaving the sides still far apart.

The group of six have tried to insulate themselves from sharp political divisions on budgetary matters, attempting to design a long-term deficit plan mirroring recommendations made by a fiscal commission set up by the White House including members of both leading parties. But the group – led by Mark Warner, the Virginia Democrat, and Saxby Chambliss, the Georgia Republican – has been hampered by many of the same disagreements over healthcare spending, the social security programme, and taxation that have pitted their parties and the White House against one another.

But Mr Warner said his efforts would continue. "Our fiscal challenges are too great to stop working toward a comprehensive, bipartisan solution. I intend to keep working in good faith on these issues because we have made too much progress to stop now".

Goldman Sachs Group Inc. executives expect to receive subpoenas soon from U.S. prosecutors seeking more information about the securities firm's mortgage-related business, according to people familiar with the situation.

Officials at the New York company believe the Justice Department will demand certain documents and other information, possibly within days, these people said. Spokesmen for Goldman and the Justice Department declined to comment Thursday. Subpoenas don't necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely. The company turned over hundreds of millions of pages of documents to the Federal Crisis Inquiry Commission, a 10-member panel that examined the causes of the financial crisis. Goldman also gave tens of millions of documents to the Senate Permanent Subcommittee on Investigations.

Last month, the Senate subcommittee referred its findings to the Justice Department, and Goldman officials anticipate any subpoenas would be issued in response to the information now being sifted through by prosecutors, said the people familiar with the situation. The subcommittee's 639-page report, completed after a two-year probe of the mortgage machine built by Wall Street firms before the crisis, accused Goldman of making a huge bet against the housing market, misleading investors, mismanaging conflicts of interests and putting its interests ahead of those of clients.

Sen. Carl Levin (D., Mich.), who leads the Senate subcommittee, has said Goldman should be investigated criminally for its actions during the financial crisis. He couldn't be reached for comment Thursday. Goldman has said repeatedly that it simultaneously took "long" and "short" positions on mortgages as part of its normal business. While those bets sometimes resulted in a net short position, meaning Goldman would benefit from turmoil in the housing market, the company usually had a bullish overall bet during the crisis, according to the firm. As a result, Goldman suffered losses when the real-estate bubble burst.

Last month, Goldman said it disagreed with "many of the conclusions of the report," though the company added that it takes "seriously the issues explored by the subcommittee." As part of last year's settlement of civil-fraud charges with the Securities and Exchange Commission, Goldman admitted making mistakes but denied wrongdoing in its handling of a mortgage-bond deal called Abacus 2007-AC1. As part of the SEC's probe, which led to a $550 million settlement by Goldman, the company provided the agency with a mountain of trading records, business documents and emails. Goldman didn't admit or deny wrongdoing.

Since then, Goldman executives have worked hard to put the distracting, embarrassing mess behind the company. A revamp of internal procedures included more-detailed disclosures about lawsuits, regulatory investigations and other legal risks facing the company. Goldman's latest quarterly report filed with the SEC included a 7,852-word "legal proceedings" section. In 2007's first quarter, which came just before the crisis erupted, the same section was just 406 words long.

Investors remain jittery about Goldman's potential exposure to civil and criminal action. The company's share price sank last week after a Rochedale Securities analyst recommended dumping the stock, citing the possibility of criminal charges. On Thursday, Goldman shares slipped $1.50, or 1.1%, to $139.34 in 4 p.m. New York Stock Exchange composite trading. "Any step in the direction of criminal charges would be bad news for Goldman's stock price," said Jeff Harte, an analyst at Sandler O'Neill + Partners LP.

Mr. Harte speculated that U.S. prosecutors are unlikely to bring criminal charges against Goldman because they probably already have seen much of the information amassed by the SEC during its civil investigation. The SEC has an information-sharing agreement with the Justice Department. Criminal fraud cases face a higher legal hurdle than civil charges because prosecutors must prove to a jury that the defendant intentionally committed fraud. "Ordinarily, a criminal securities-fraud case based on the same facts would be even more difficult to prove," said Russell Ryan, a partner at law firm King & Spalding who previously was an SEC enforcement lawyer.

The SEC was split over proceeding with civil charges against Goldman for the Abacus deal, and the agency's five commissioners voted 3-2 in favor of filing a lawsuit. U.S. officials are under pressure from lawmakers and many Americans to punish Wall Street executives for their actions during the financial crisis. Goldman's muscle in the financial markets and outsize profits compared with rivals have made the firm a focal point for public anger. Still, U.S. Assistant Attorney General Lanny Breuer cautioned last year that prosecutors "simply can't and won't indict people based on outrage or suspicion alone."

Securities regulators are out to tame the credit rating agencies, crucial Wall Street players at the center of the financial crisis. The Securities and Exchange Commission proposed sweeping new rules on Wednesday to overhaul the rating business – regulations that would force tougher internal controls, curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees.

"These rules are intended to help investors and other users of credit ratings better understand and assess the ratings," Mary L. Schapiro, chairwoman of the S.E.C., said at a public meeting on Wednesday. "It is a massive proposal," she said of the plan, which spans more than 500 pages. The S.E.C.’s five commissioners unanimously agreed to advance the proposals, which are now open for public comment for 60 days.

The agency’s Republican commissioners indicated, however, that they would push for some changes. The proposals "could be life threatening" to small rating agencies," Kathleen L. Casey, a Republican commissioner, said at the public meeting. A rating agency, for instance, would have to take on the costs of periodically administering performance exams that would "test its credit analysts on the credit rating procedures and methodologies it uses."

The proposals stem from the Dodd-Frank Act, the financial overhaul law enacted last year. The S.E.C. has already proposed new policies under Dodd-Frank that would strip references to credit ratings from rules that govern securities offerings and capital levels at brokerage firms.

The rating agencies in recent years became a target in Washington, as regulators and lawmakers blamed them for feeding the mortgage bubble by awarding top grades to bonds backed by subprime mortgages. These investments later soured, causing the economy to crumble. A Congressional panel that chronicled the crisis called the largest rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — "essential cogs in the wheel of financial destruction."

The problems, critics say, stem from an inherent conflict of interest plaguing the rating agencies’ business model. Banks and corporations that issue debt must pay the rating agencies to assign their bonds a letter grade. In the lead up to the crisis, the rating agencies had a heavy hand in the mortgage bond business, as they advised big banks how to earn a top triple-A grade. In a quest for profits, the critics say, the agencies compromised the integrity of their ratings.

The S.E.C.’s proposal intends to mitigate some of those conflicts that have long hurt the industry. The plan would prohibit analysts from issuing a rating if they also marketed their rating agency’s products or services. Small rating agencies can apply for an exemption from this rule. The S.E.C. would further require rating agencies to tighten their internal controls and evaluate the effectiveness of the controls in an annual report to the S.E.C.

The proposal also takes aim at the revolving door between the rating agencies and Wall Street firms that seek the grades. Under the plan, the rating agencies would have to examine whether their former analysts awarded overly rosy ratings to a firm that later hired that person. In such cases, the rating agencies would have to "promptly determine whether the credit rating must be revised."

Ms. Casey warned that this proposal "threatened to cross the line" into dictating the substance of credit ratings. "I am concerned that this is such a slippery slope," she said. Still, some argue that the proposals do not go far enough.

In the final days of negotiations over Dodd-Frank, lawmakers stopped short of eliminating the so-called issuer pays model that causes potential conflicts of interest. Instead, lawmakers opted for a compromise. The S.E.C. must now study whether to create an independent body that will randomly assign ratings to different agencies.

The rating agencies fiercely oppose this plan, among a few other Dodd-Frank proposals. Some rating agencies also may target a proposal that would require the industry to disclose how well their ratings have performed over time.

"One significant concern is whether the S.E.C. will follow up on this rule-making by actively pushing back at rating agencies if these attempts at mandating greater rating agency transparency turn out to produce opaque or formalistic disclosures in practice," said Jeffrey Manns, a professor at George Washington University law school, who is an expert in credit rating agencies.

Capitalism is supposed to produce losses on bad investments. But all too often it has not. In Tokyo this week, corporate executives were outraged when a Japanese government official suggested that banks might have to take losses on loans to the company that produced a nuclear catastrophe.

Yukio Edano, the chief cabinet secretary, had the temerity to say "the public will not support" the injection of government money into Tokyo Electric Power, also known as Tepco, unless banks share in the pain. Tepco says it would like to pay compensation to victims, but needs government cash to do so. The president of Japan’s largest bank, Mitsubishi UFJ Financial, was shocked by the very idea that a bank should lose money if it lent to a company that could not meet its obligations. Mr. Edano’s remarks "came out of the blue," said the executive, Katsunori Nagayasu. "I felt there was something wrong about them."

To Yasuchika Hasgawa, the chief executive of the Takeda Pharmaceutical Company and chairman of the Japanese Association of Corporate Executives, the idea violated basic tenets of society. Mr.Hasgawa said he "cannot help but question how this country’s democracy can be made to work with free-market-based capitalism." His definition of "free-market-based capitalism" seems to assume that lenders should escape without pain, at least if they are lending to major institutions. It is an idea that has become remarkably pervasive.

"We consider banks and Tepco systemically important institutions," wrote Tetsuya Yamamoto, a Moody’s analyst based in Tokyo. "Debt forgiveness undermines the systemic importance of the bank and utility sectors in the national economy." These are, he added, "developments we did not anticipate." It has been more than two months since an earthquake and tsunami caused radiation leaks at the Fukushima nuclear power plants. Residents have been forced to evacuate a large area, and there is no assurance when the plants will be brought under control.

Tepco is clearly to blame. In hindsight, the plant should have had better protection against both earthquakes and tsunamis, or it should have been built in a region less vulnerable to them. Yet it is deemed shocking to suggest those who financed the company should suffer losses.

In "free-market-based capitalism" — or at least the version they used to teach when I went to business school — lenders and shareholders were supposed to monitor the risks taken by companies. They would benefit if the company prospered and suffer if it failed.

By not spending more money on safety, Tepco was taking a risk. That risk did not work out. The question now is who will pay the bill. If it is the investors, that would serve as a powerful incentive to the other nuclear plant operators to make changes. If it is the government, with investors protected, we are left with only the hope of better regulation to prevent a recurrence.

Tepco shareholders have suffered, but the shares are still worth something, if you believe the stock market. Tepco lenders seem to think they should be allowed to collect every yen they would have received if nothing had happened. Maybe even more, since this could serve as a reason to charge higher interest rates to utilities.

That is, more or less, what happened to most bank investors in the financial crisis. The American government chose not to rescue Lehman Brothers, a fact that stunned investors and precipitated a panic. In the aftermath, it was considered too dangerous to even question the safety of bonds issued by banks. A suggestion they could bring losses might have caused more banks to fail. So while bank shares fell sharply, bank bonds did not default.

In Ireland, it was even more absurd. Bailing out collapsing banks left the Irish government unable to pay its bills without a bailout of its own, and forced it to embark on a bitter policy of austerity that has hurt every citizen. But senior bondholders of the failed banks are being protected, and it was considered a victory that subordinated lenders agreed to take partial — not complete — losses.

In the United States now, there is anger that few bank executives have faced criminal charges. Perhaps more charges should be filed, but excessive risk taking, in and of itself, is not illegal. As Roger Lowenstein wrote in Bloomberg Business Week: "The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors and regulators were all blind to risk."

The anger might be better directed at the fact that those whose bad decisions led to the crisis did not suffer, or that not enough of them did. Some bank bosses did lose their jobs, but the replacements usually came from the next level down, and were hardly uninvolved. Bondholders who financed the bubble were allowed to walk away. When the bailouts were taking place, I thought protection of lenders to the banks was justified to keep the crisis from getting even worse. In hindsight — and with the memory of the terror of those days dulled by the passing of time and the knowledge that we did avoid Great Depression II — I am less certain.

If all the banks that were bailed out had been forced to restructure their debts — that is, make their bondholders suffer losses — then banks would have been more reluctant to take bailouts. Those that had to take them would have been the only ones scarred with what Jamie Dimon, the chief executive of JPMorgan Chase, later called the "scarlet letter." Instead, all were scarred, which in practice meant there was little public differentiation between those, like JPMorgan, that had been run well, and those, like Citigroup, that had not.

Without losses, why should we think investors will do a better job of monitoring what is being done with their money? In Europe, it is becoming clear that Greece will have to default at some point. But that would hurt banks that were foolish enough to buy bonds from a country they knew had lied its way into the euro zone. Such an outcome is deemed unacceptable. So they go on pretending that Greece will someday be able to pay back its loans.

In this age of government austerity, it is deemed mandatory that important borrowers retain access to capital markets. That they have such access only because governments are thought to be the real lenders of last resort does not have to show up in government budget statements, and so can be ignored. In Japan, the government may be backing down.

"Talk of debt write-offs is a bit too extreme," Koichiro Gemba, the national strategy minister, told an interviewer on Asahi television a few days after Mr. Edano shocked the banks, "since that would mean that Tepco would not be able to borrow again."

US Federal Reserve rate-setters held a detailed discussion on how to exit easy monetary policy according to the minutes of their recent meeting. Discussion of exit strategy shows how debate on the Federal Open Market Committee has turned towards tightening of monetary policy rather than further easing. But the FOMC noted the discussion "did not mean that the move toward such normalisation would necessarily begin soon".

The US central bank’s plans for how it will eventually raise interest rates and reduce its bloated balance sheet are of intense importance for bond markets. In the discussion, nearly all FOMC members said that the first step towards exit would be stopping the reinvestment of early repayments from the Fed’s portfolio of mortgage-backed securities. The committee also confirmed for the first time that it plans to stop reinvesting principal payments on its Treasury securities "simultaneously or soon after" it stops MBS reinvestments.

A majority of FOMC participants said they would prefer to start sales of MBS after increasing the Fed’s target for short-term interest rates. They argued that if the Fed raises interest rates first, it would have the power to cut them again if the economy weakened, rather than being trapped by the lower limit of zero. Most people at the meeting said that "once asset sales became appropriate, such sales should be put on a largely predetermined and pre-announced path", but that path "could nonetheless be adjusted in response to material changes in the economic outlook".

This suggests that the Fed could promise to sell a quantity of assets over a fixed period of time, just as it promised to buy $600bn over eight months in its latest ‘QE2’ programme of asset purchases. Some FOMC participants wanted to vary the speed of sales more actively in response to the state of the economy. The FOMC was balanced over when to start to tightening policy. The minutes said some participants thought that "in the context of increased inflation risks and roughly balanced risks to economic growth, the committee would need to be prepared to begin taking steps toward less accommodative policy".

A few members thought that the Fed might need to tighten policy later this year, but some felt that "an early exit could unnecessarily damp the ongoing economic recovery". This suggests that the Fed is still unlikely to raise rates or sell assets during 2011. The minutes are the first to follow a Fed meeting after which Ben Bernanke, the chairman, has given a press conference. That discussion and the early publication of the Fed’s economic projections were expected to reduce the value of the minutes. However, the detailed discussion of exit strategy suggests that the minutes will still play an important role in communicating the details of Fed policy.

Tokyo Electric Power Co. said Friday it logged a net loss of ¥1.247 trillion ($15.28 billion) for the fiscal year ended in March—the biggest annual loss in Japanese corporate history outside the financial sector—as it was hammered by massive costs in battling the Fukushima Daiichi nuclear accident. With compensation liabilities expected to run into trillions of yen (tens of billions of dollars), Tepco also warned that the "significant deterioration" in its financial position "raises substantial doubt about its ability to continue as a going concern."

As expected, the operator of the crippled nuclear power plant said President Masataka Shimizu will step down to take responsibility for the company's much-criticized handling of the March 11 disasters that crippled Fukushima Daiichi. Toshio Nishizawa, one of a clutch of joint managing directors and a 36-year veteran at Tepco, will take over the post.

Tepco, whose handling of the disaster has drawn widespread criticism and prompted the government to step in with a comprehensive rescue plan, reported a net loss of ¥1.247 trillion for the 12 months ended March, compared with a net profit of ¥133.78 billion in the previous year. Tepco's fiscal-year loss far outstrips Japan's previous record loss by a non-financial firm—¥834.67 billion posted by Nippon Telegraph & Telephone Co. in the fiscal year through March 2002. It also underlines the scale of the challenge facing Japan's largest utility as it struggles to bring the country's worst-ever nuclear crisis under control.

The company reported a one-off loss of ¥1.02 billion on a parent basis as it grapples with the costs of decommissioning four reactors at the Fukushima nuclear complex, and with fuel costs likely to spike as it restores fossil-fuel power plants to make up for the lost electricity. Tepco said it will permanently shut down the damaged reactors and cancel a previous plan to build two new reactors there.

Underlying the company's relatively solid performance prior to the crisis, it booked an operating profit of ¥399.62 billion in the just-ended fiscal year. That was up 41% from a profit of ¥284.44 billion in the previous year. Revenue stood at ¥5.369 trillion, up 7% from ¥5.016 trillion. Earlier this month, the government outlined a plan to set up a state-backed institution to be funded by both the government and Japanese nuclear power operators to support Tepco in paying off compensation claims to people affected by the nuclear disaster.

But one of the government's conditions for aid, which the company accepted, is that Tepco set no prior ceiling on the total amount of compensation. J.P. Morgan Securities estimates compensation costs to be borne by Tepco will amount to ¥2 trillion for the current fiscal year that started April 1. Bank of America Merrill Lynch estimates the utility could face compensation claims of up to ¥10 trillion-¥11 trillion if problems at the Fukushima Daiichi nuclear plant can't be resolved in the next two years.

On the back of deepening uncertainty over how large the ultimate costs will be, the company didn't provide an outlook for the current fiscal year and said it won't pay a dividend for the full year. The last time Tepco skipped an annual dividend was in its first year of operation, 1951.

Fund Manager Turned Farmer Faces DroughtEuropean farmers are contending with the driest growing conditions in more than three decades. The European Union warned this week that soil moisture is now “critical” in at least six countries after some places had their driest March on record.

ok, after skimming through the article on 401k's am i getting this right? you put aside part of your paycheck into some sort of fund and then you have to pay interest to borrow your own money if it's taken out before retirement? and now the government wants the power to replace those funds with IOU's? this is absolutely f-ing insane! why would anyone agree to this? I'm self-employed and never had a 401k so therefore know very little about it so correct me if i'm wrong.

Yes, that's basically how the 401k system works. Also note that you can attempt to withdraw your funds prior to retirement, but you will face stiff resistance from the firm administering your 40k and get socked with a huge tax penalty.

There has been about 40 000 people in streets protesting against the government here in Prague (Czech Republic). There is something in the air, I guess. People are definitely not happy about the situation. The political crisis is getting worse quickly both in the CZ and in Europe, it is quite obvious. Austerity measures have been taken and Reaganomics is the only official ideology, but the middle class is obviously supposed to pay it all. Nobody cares that billions dissappear every year in the corrupt government.

Golem XIV writes and discusses very succinently about similar issues than we do here on TAE. Here's a story about Spain and this one about banks laundering money. Plenty of other sad/great stories over there, recommended.

I have never had a 401-k as except for a short stint as a high school science teacher in the 90's (which had a traditional pension plan), I have been self-employed since 1980. Consequently I have little expertise with them, but as readers here know, being ignorant has never stopped me from commenting. With luck, all my errors, as with my URL declarations, will be cleared up by later, better informed commenters.

The advantages to 401-k's, as opposed to IRA's is that your employer co-contributes usually one half of the total annual deposit. This is the big attraction. Also, I believe that the total annual contributions allowed are much larger than a plain vanilla IRA, though I have lost track of the current limits for both, and since I have neither as well as no earned income beyond sporadic roadkill, I am too lazy to look it up.

Like the traditional IRA, if you withdraw anything early, it becomes added to that year's taxable income plus you must pay an additional 10% penalty.

The biggest disadvantages to 401-k's compared to IRA's is that short of quitting your job, it is much harder to get your money out, penalty or no. Also, the employer hands you a Chinese menu and you have to choose the investment from that menu. If you like General Chau chicken and it's not on the menu, then you are SOOL. Also, psychologically the Federal government, for whatever arcane reasons, believes that they have more rights to confiscate your 401-k than an IRA. I think the Federal dinner menu goes like this:

1) Federal pensions excluding Congresscritters'2) 401-k's3) Public state and local pensions3) IRA's5) Private employer pension plans (what's left to them after the great Wall Street extraction)4) Pennies on a dead mother's eyes 5) Cappuccino with fruit

I would like to recommend the following 45 minute podcast between Chris Martenson and John Rubino. It centers around the future of the USD but touches all sorts of other subjects. Very easy to listen to, pleasant spoken, intelligent, and non-dogmatic. While I might disagree with the probabilities which they affix to possible outcomes, they do a nice job of laying out their reasons. And as Yogi Berra says:

The nice thing about laundering US dollars is that since they are all the same color, you don't have to separate them into different washes. Saved Wells Fargo a bundle with their Mexican drug operation.

In yesterday's thread, I mentioned that an old friend of mine was married to an epidemiologist at the CDC and I was going to check in with her about zombie preparedness and the CDC web site. Her reply was short and to the point:

One mitigating factor WRT gold: A lot of the people who have bought gold subsequent to the economic meltdown of 2008 are those who "see a Bad Moon Rising" and are consequently gold longs or at least gold medium-longs. However, if a hard crash in gold builds up enough momentum, the small-potatoes players would likely be inclined to sell their gold sooner rather than later.

"Mature Adults..The endangered demographic, which is projected to die out completely by 2060, is reportedly distinguished from other groups by numerous unique traits, including foresight, rationality, understanding of how to obtain and pay for a mortgage, personal responsibility, and the ability to enter a store without immediately purchasing whatever items they see and desire."

How scary is that?

"..the nation’s population of mature adults has been pushed to the brink of extinction, with only 104 grown-ups remaining in the country today...if nothing is done, these wondrous individuals, with their special ability to consider the long-term consequences of their own behavior and act accordingly, will be wiped-out completely."

It may be that this race for technological innovation is nothing other than the best efforts of our civilization to ensure that we citizens keep producing and consuming, and remain focused on the future. We are being led to the abattoir of our own planned obsolescence by a marketing wizardry that locks us firmly onto a path of never-ending progress. Could this also explain our disproportionate emphasis on free will and unrestrained choice in America? After all, it provides an unassailable platform from which to produce and market an inexhaustible stream of saleable products and commodities that in turn validates our freedom, again keeping us future-oriented and chasing the ever-receding horizon of our Dream.-- Sandy KrolickTinkerers on the scaffolding, or the recovery of ecstasy

I think Sandy almost got it right. He just needs to Turn the Beat Around. All the technology dumpster diving is a result of, not the cause of, future focus. Future focus is requisite in a credit money system. As I have represented here before, credit money is created in the future and wormholed back to the present via an instrument called debt.

If too much of that transferred wealth is not carried forward, in some instance of value, to the contracted future date, the fabric of the universe might tear like an old bedsheet. Thus the near universal wage slavery and flogging of brainpower in the richest parts of the world. There must be a new iSomething every few months to keep the wealth flowing toward the future. Everybody knows that something bad happens, shudder, when universe fabric tears.

Unfortunately, intelligence in a stunning demonstration of its lethality presumed to have found ways to turbocharge wealth creation. Promising the future far more wealth than humankind can possibly conjure up was a very bad idea. I gather the Spanish got to be particularly good at making such rash promises. The Pain in Spain will most likely rain on us all, but I wonder if the Rain in Spain isn't mainly falling on Middle America and that also ain't a good thing.

@el G. What is your problem with the whole thing? Most of my aquaintance thinks it was a brilliant ploy to get a ton of free MSM publicity for their basic message recommending being ready for a few days cut off without utilities.

I think my tax dollars did a pretty darn good job in this particular instance.

Having pontificated above on the credit money system and its lethal outcome, I will now devote a few minutes to address the now largely irrelevant hard money system. As per the disclaimer issued by my Geez Squadron Leader, El Gallinazo, I am not trained for this, which probably makes me as well qualified as anybody. ;)

Hard money is created in the past. Just as credit money focuses attention on the future, hard money seems invariably to cause humans to know a lot about the past and almost nothing about the future. That makes perfect sense because your future is guaranteed bleak until your past has somehow garnered you a pile of that hard money.

Having flown so high on the credit money system, I see the outcome for humankind being about the same if we switched to hard money as it will be if we stay with credit money. The wing attachment wax is already softening and hard money is heavier than credit money. It looks like we are headed for a big splat either way.

That is another way of saying that there are too many humans for a hard money system to sustain and hardly any of us are in any way prepared for hard money living. Either we fly into a hole in the universe or the weight of gold and silver tears our wings off and we are roadkill. Bon Appétit my Squadron Leader.

Well sure! Did anybody think the Grand Imperial Lizards were just going to give up without a fight? Them kids better put aside their Peaceful Banners and study the ins and outs of guerilla warfare if they want to have any chance at something resembling a real democracy. Because the Lizards are not just gonna hand it to them on a platter. The Lizards want, what the Lizards want, and they're pretty darned good at getting what they want. Because they cheat!

I knew someone with "expertise" would jump on the comment. And what with Blogger giving us its increasingly frequent bad hair day, I hoped for a little comic relief.

Gold is a commodity, money is a concept. Gold and most anything else can be used to represent money. Whatever enough people can be induced to accept. People have been known to use candy bars and nylon hosiery. Gold is divisible, as you say, but below a certain threshold it will get to be awfully hard to handle and rather easily lost. Of course, one could plate it on tungsten, or paint it on wooden nickels. Who knows what our lethal intelligence might come up with?

As to the question of sustenance, well as you said money is a medium of exchange. We got to 7 billion humanoids because we created money out of thin air, or as I said, in the future via debt, spurring previously inconceivable devotion to inventiveness and to work. Yes, we went too far and the price for that hubristic error will be exacted.

The reason we face collapse is because although the incentive is still there, the opportunities to create the wealth necessary to satisfy the debts have actually diminished. That problem, which is substantially a natural resources issue, doesn't go away by turning gold into money. I tend to assume that it will make the problem worse because the stuff just doesn't circulate well. History strongly indicates that for a huge segment of the population it will be roughly as obtainable as a credit money loan with a FICO score of zero.

If you seriously believe that the bastards that control most of the gold are going to clip off tiny little pieces and scatter them around to the likes of you and me then I am inclined to doubt your expertise on this matter. Because none of the Mammonites that I've ever met showed any sign of having that kind of character. Nope, when gold is money and you want some, you'll have to go and pan it out of the stream yourself. Or rob the poor bastard that already did.

When money is rare, it is rarely freely exchanged. Ask any destitute person. Commerce will in no way resemble what we currently know. I imagine you have seen the sign, Will Work For Food. In a scarce money society, whether it be golden or credit squeezed, the sign won't be necessary. They will know.

I knew someone with "expertise" would jump on the comment. And what with Blogger giving us its increasingly frequent bad hair day, I hoped for a little comic relief.

Gold is a commodity, money is a concept. Gold and most anything else can be used to represent money. Whatever enough people can be induced to accept. People have been known to use candy bars and nylon hosiery. Gold is divisible, as you say, but below a certain threshold it will get to be awfully hard to handle and rather easily lost. Of course, one could plate it on tungsten, or paint it on wooden nickels. Who knows what our lethal intelligence might come up with?

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Gold is a commodity and so is "any" acceptable money--how hard is it for you to figure out-for eg: the fact-that you sell your cash for gas and the oil company sells you gas for cash--

Your comeback about little pieces of gold circulating as money is one of the most anal comments I've ever read-Even during gold standard-very little physical gold changed hands-they used "certificates" ie: USD's to carry the gold and further more-we already have digital gold circulating today ie: goldmoney.com and the holder never touches the gold-but has a bank card-like you do-

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As to the question of sustenance, well as you said money is a medium of exchange. We got to 7 billion humanoids because we created money out of thin air, or as I said, in the future via debt, spurring previously inconceivable devotion to inventiveness and to work. Yes, we went too far and the price for that hubristic error will be exacted.

The reason we face collapse is because although the incentive is still there, the opportunities to create the wealth necessary to satisfy the debts have actually diminished. That problem, which is substantially a natural resources issue, doesn't go away by turning gold into money. I tend to assume that it will make the problem worse because the stuff just doesn't circulate well. History strongly indicates that for a huge segment of the population it will be roughly as obtainable as a credit money loan with a FICO score of zero.

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You know what kills me about some people--they live with the belief that debt cannot vanish in a second-ie: Iceland

I'm not sure why you're mixing in the fact that we have nothing at this time to power the economy and of course-no matter what we have for a money supply it has no sustainable economic driving power-but it has nothing to do with the topic of "money supply"

If you seriously believe that the bastards that control most of the gold are going to clip off tiny little pieces and scatter them around to the likes of you and me then I am inclined to doubt your expertise on this matter. Because none of the Mammonites that I've ever met showed any sign of having that kind of character. Nope, when gold is money and you want some, you'll have to go and pan it out of the stream yourself. Or rob the poor bastard that already did.

When money is rare, it is rarely freely exchanged. Ask any destitute person. Commerce will in no way resemble what we currently know. I imagine you have seen the sign, Will Work For Food. In a scarce money society, whether it be golden or credit squeezed, the sign won't be necessary. They will know.

*****************Where do you come up assuming what i believe-Don't try and build a straw man with me-btw-you write like a hyper-inflationist-three miles of BS and nothing intelligent said-you also prove you have zero understanding of gold standard-it's really quite simple-if you work-you get paid in gold-if you spend-you spend in gold--not one bit different than what happens today-your panning gold crap is nothing but hype-

Here's a question you might like to answer about "rarity"If gold was locked down at say-1 million/oz.would gold be scarce?

I had a 'city slicker' friend talking to me awhile back about how he would spend gold in bad times.

Not in an idealized world where a semblance of order and the rule of law prevailed but in a King Hell Global Deflationary Depression situation. Not in a world where the nicety of a 'gold certificate' exchange system was set up but in a Wild West Show atmosphere.

He repeated the ounce of gold for a cow thing, historic precedents and value of hard goods in gold through the ages stuff.

The Lizards Masquerading as Humans running Le Show are already lying day and night through their forked tongues about gold I said.

Seriously, do you really think there is any gold left in say Fort Knox? Hahahaha

Honestly, The Lizards sold it all off long ago, and they sold the same gold multiple times to multiple parties who now have multiple, multiple, multiple claims on the same stuff. Hahahaha

The gold and silver certificate scheme for 'sharing the wealth' and allowing 7 billion Pissants to use it as a medium of exchange is just that, a scheme.

It's only as good as the accounting system behind it which at this point in history is Gobshit.

Wakethephuckup, mark to fantasy accounting is now the Standard, it would be just as corrupt for 'gold & silver certicates'. Just look at what a mockery JPM has made of the silver market.

Unless the damn stuff is in my hands, it is a fantasy.

And in a small town, if you trade Farmer Brown an ounce of gold for a cow, EVERYONE in town will know about it, that's just how the Realpolitik of small town gossip works.(It's the same in city neigborhoods, word gets around fast)

And in real hard times, if everyone knows who spent what with whom, especially 'the bad guys', you might as well paint a gold bulls-eye on your forehead.

It makes a fantistic aiming point, it glitters so beautifully in the Sun._

@IlargiCan you point us to one or more of your posts where you explain in more detail why you are not so high on PM's? It is hard for those of us who have not done as much work as you to understand, since it seems like having a Fed which is willing to monetize every debt on earth, if necessary, makes PM's a better currency than the dollar. I certainly understand that the government will continue to use the tax code to discourage PM ownership.

I should add, in addition to its willingness to monetize every debt, I have no doubt of the Fed's willingness to issue a debit card to every American and load them with dollars every month or week or day -- the modern equivalent of Bernanke's helicopter drop plan.

The physical or electronic supply of money is not the issue, it is the general availability of that money throughout the productive economy. Like IM said, gold-backed money will not solve that glaring problem any better than printing Treasuries will, and that's even assuming energy/resource scarcity is not an issue.

Debt-based instruments (most money today, including gold-based derivatives, aka "paper gold") are not just mediums of exchange, they are a means of control over productive assets, including everything from labor to machinery and scientific knowledge (secured patents on chemical arrangements, for example). The problem is, who are these controllers producing for? What happens when people cannot afford all of the fancy things they produce?

Gold or its monetary representation would have to essentially be gifted to people around the world, but then what's the point? More in-depth discussion of this issue in Part II of my gold series. Once again, this is a problematic issue outside of ecological ones, and those are probably even more important to consider, but over a somewhat longer time frame (but not THAT much longer).

That is the 64 trillion dollar question, will the frightened chickens smother themselves to death in the Gold corner or the Dollar corner of the global coop when it inevitably catches fire.

Hmmmm, think of it this way, The Lizards only need enough panic money flooding into dollars to service the interest payment rollovers on u.s. Debt. They don,t need all the global assets in dollars. In fact, they know the dollar is eventually toast and behind the scenes they want to unload their own dollars on a Greater Fool and buy up hard assets for pennies.

So what if a lot of global wealthy buys gold in a panic instead of dollars, more than enough 'dumb money' will head for the safe harbor of the reserve currency and that's all they need.-

I suppose, it being Sunday, at least on this side of the world, might be the cause of the Faithful being here in some force today. There are believers that a bunch of guys operating out of an office next to a pirate cove on the Isle of Jersey actually have the gold that they claim. Another believes the Founding Fathers, who among other things fathered children with their slaves, were fine upstanding Judeo-Christian men who created a working system of checks and balances. Which have hardly ever worked as claimed and don't seem to work at all today.

The pined for system of financial checks and balances has existed for quite some time now. It is called double-entry bookkeeping. Unfortunately, just like the constitutional checks and balances, it will only work if nearly everyone is both honest and courageous enough to make it work. Those traits are in short supply in the areas where the bookkeeping is done.

i was reading on max keiser's website that the Linkedin IPO now marks the start of a new bubble era in the u.s., as soon we'll see facebook, zenga, etc go public as well and this is positive for the dollar, and when you add eurozone issues, it seems like we'll see a major uptick in the dollar. wondering reader's thoughts on this?

I love the chicken coop analogy! Good question. Based on the advertising trend, PMs seem to be ahead right now, but the advertising trend may not correspond to the chickens' thinking.

I just spotted this in a comment over on ZH and thought it interesting: By the way, the Chinese Govt has just begun an official crack down on the private use of Copper as money , so one of the demand drivers is being curtailed. Yes, Copper is the main metal average Chinese can afford as a paper money substitute so the Gold/Silver story there looks to be the beneficiaries if -- big IF -- they are allowed to get richer.

As for a show of wealth attracting unwanted attention, I think it will not matter much whether your little pirate chest is filled with doubloons or brass dollar coins. If your small community knows you have a pile of pearls or rubies or krugerrands, security will be an issue.

Which gets us back to the issue of community. Who you know, and how you are connected, will have a certain currency all its own in the coming years. Sitting alone like I am now in your comfy spot and chatting online will probably be a lot less important.

That's mostly ridiculous. A new stock-bubble "era" a) is not going to happen, and b) would not be positive for the dollar. The EU issues and a "Linked In" crash, on the other hand, most likely will be for some time.

I.M. Nobody, can you please point out what I said that gave you the impression that I believe that the "Founding Fathers, who among other things fathered children with their slaves, were fine upstanding Judeo-Christian men..."?

The reason that the system of checks and balances doesn't work so well today is because we've strayed so far from the Constitution.

Keeping the books is, has been and forever will be yin-yang abused not only by the dishonest (because they can do so), but also by the honest (because they must do so).The call to be "fair" (IMHO a more balanced measure of both absurdities), is answered in many ways and as you so astutely observe, we have an over abundant supply of those who know very well the meaning of the word(s), but choose quite boldly, not to put them into practice. Greed is easy.

As we attempt to plead and rail against these daily "I don't give a shit" pileups, I have a sense that the tangled flesh and metal milkshakes will become so great so soon that those who are so busy counting their treasures will wonder 1) who just smashed into them and 2) why no one will be coming.......

I don't think anyone is saying gold or any other type of money can cure today's problems-

The point is-with a locked money supply prices will have to meet that supply-

Of course FRB is the problem no matter what the supply of money consists of-

Gold standard worked fine for 100 years in the UK-yet today it is a wide spread belief that it can no longer function as a money supply-i say prove that-with more than just theory-

I'm overweight USD and i also hold gold-because i believe we will have a severe deflation and also think USD hyper-inflation is a joke at this point-

I don't follow your "gold must be gifted out statement-If gold was to become the basis of our money supply-any one who has money now or gets a paycheck would instantly hold gold-Gold does not or cannot solve today's problems-nor is it meant to or any other money supply-We have a debt problem in an economic downturn-default is the only way out-

"Money" is the best play in deflation and i believe gold is money-

It's hard to have any kind of meaningful debate here because most of my posts are always blocked or eaten-

Hey if I was young enough and had money enough I would buy a farm in the woods but walking distance to a small town and forget gold. Oh jeez, I forgot that I did that 15 years ago when I was sort of young.

I'm saying the reason why the gold-backing of the dollar was abolished is that the system needs debt in order to keep growing (to grow demand), and credit growth in turn needs a growing money supply. Now, if much of the debt is destroyed via pay-downs and default (and/or HI for that matter), that wouldn't change the fact that system needs to continue pulling forward demand via credit growth. After a short period, a gold-backed currency would once again limit credit growth too much, and it would either be abolished or the gold's value would be severely diluted to allow for more currency availability (as a medium of exchange).

The reason why it wouldn't last nearly as long as it has in the past is because we are implementing it at this specific point in time, when wealth has been highly concentrated among a small % of the global population with each iteration of the credit boom/bust cycle. That means there is very little productive capacity for most people to support the necessary debt levels for global economic growth.

Chas said...The US Constitution was created by men who had a keen understanding of Judeo-Christian principles and were well aware of the fallen nature of man. Hence the created a system of checks and balances.

Do those words look familiar Chas? I wonder how I could possibly have failed to understand that you were not suggesting they were fine upstanding members of that community. It's a mystery.

Those of us with pagan leanings or a dose of agnosticism or atheism may have latched onto the concept of Lethal Intelligence to explain why things are going to Hell. But, Fallen Nature of Man has some explanatory power as well. It's only real flaw is that it implies that a terminal outcome is somehow avoidable.

I will now backtrack and refute my earlier claim that the C's&B's are not working. They are of course working perfectly well and exactly as the people with their hands on the levers want them to work. That doesn't happen to be the way most of us might like them to work. So it goes.“dying civilizations often prefer hope, even absurd hope, to truth.”-- Chris Hedges

There it is, you can hope for good government. You can hope for financial salvation. The truth is, we're screwed. For a more penetrating analysis, I direct attention to the latest posting on Joe Bageant's website by Morris Berman. Bageant’s Frustration: Extreme Isolation

BTW, I'm certainly not talking about investment decisions here, and you're right that whatever is accepted as "money" in your region is always a "good play"... which may just end up being direct barter items in some places, or gold in others. However, during an actual dollar deflationary process, I doubt neither paper nor physical gold will retain its current purchasing power priced in dollars.

And I also doubt that your comments are actually being blocked... sometimes Blogger just acts up a lot. I find it happens more often when I'm using the Firefox browser.

If you have some spare cash after you have taken care of necessities, by all means buy some precious metals. If not Gold, then silver.

Gold will be of some value indeed post collapse in 2 of 3 scenarios as I had mentioned a few days ago.

In the hopelessly unlikely scenario that BAU continues, Gold will retain some function and role in society like it has for the past thousands of years.

In a systemic collapse minus mad max, something like Zimbabwe, Argentina or post Soviet Union collapse, Gold will retain value, it might fall in price nominally - given deflation, but in real terms it might do really well. Hence, gold is a decent hedge in that respect if you are not worried about price drops and have a decent horde of cash, tools, water filters etc.

As long as society retains the ability to produce some surplus, Gold will retain value as a mechanism to exchange that surplus, and hedge against macro uncertainty, mostly political risk.

In a mad max scenario, screw it. The only metal you need to be long is lead etched with the cross for luck. The lead and luck strategy is what I call it.

Nothing is blocked, quite literally even, since I disabled comment moderation for now, but 9 comments are sitting in limbo, where we can't get to them. It's beyond weird, from where I'm sitting: the Pain in Spain post was on the front page yesterday morning, but clicking on its title gave an error, and it had vanished entirely from the archive. How it then was still on the frontpage is anyone's guess.

I reposted it, and it's in the Manager Archive now (once), but when you look at the archive widget in the right side bar, it's there twice. Clicking either will take you to the same post.

Our position on PMs is, summarized, that too many parties, large and small, who presently hold them, will have to sell in order to cover debts incurred elsewhere. This goes for governments, banks, enterprises and individuals. And yes, as we've often said, the fact that we see a far bigger overall economic plunge than most certainly is a factor in this. Many if not most see themselves muddling through if only they pick the right investment to be in. We say very few among those who now see themselves as investors will be invested in much of anything at all. The return of, not on, money.

I just had a conversation with a good friend who reiterated something he said a while back, and it's his, not my, quite brilliant notion:

"Those gold dealers tell you your fiat currency is useless, and to save yourself you should be buying gold.

And they then sell you their gold in exchange for what, exactly?!"

Then again, we've also always maintained that gold will be good and solid in the long run, but you'll have to be well enough off to sit on it for years (5-10-20), something that won't be an option for 99% of us. Taking care of essentials, food, shelter etc., will need to come first. When you have that covered, sure, go for gold. Just don't presume that cover comes cheap or easy. It won't.

Having natural resources or large amounts of Gold by themselves are not indicative of success. India has a vast amount of Gold and culturally it is a sign of wealth yet it has been in the economic doldrums for centuries, arising only recently. Why? Because that Gold is horded, it isn't circulated, trade, risk taking, business, these can only occur when the velocity of money is rising, if gold is just put under a bedsheet then it is of no value as the surplus can not be exchanged.

Nigeria has vast amounts of Oil and yet the vast majority of its citizens are very poor.

The Soviet Union had 6,000 or so nukes and vast amounts of gas and oil and still went down the crapper.

Why? Because of the erosion/ lack of trust. There was/is a lack of a proper judiciary, a lack of transparency, having resources is one thing, equitable distribution and having a mechanism to sort out legal matters is another thing entirely.

The UK has had a Central Bank since July 27th 1694, The Bank of England. Yet the British went on to create a global empire spanning the seven seas, powered innovation, the industrial revolution, industry and enterprise, had the world's largest navy and came up with some of the finest institutions known to man and so many great advances in science, medicine and art.

Their Central Bank didn't get in the way of all this human progress, they've done exceptionally well for themselves in the last 250 years.

Why? Trust and the velocity of money. People trusted each other and knew that enforcement would occur if debt wasn't repaid. The British navy was there, armed and ready. And during crunch time, the British willingly imposed austerity on themselves in the late Victorian era and took the pain, even the elites were hit badly but they protected their currency and their legal systems.

Sure there was a hell of a lot of corruption but by and large, the judiciary functioned and trust was built up. When you trust someone, you can trade with them, you can lend to them and with a functioning judiciary you can sue them and get your money back.

And money wasn't hoarded, it was distributed through society by increasing velocity. Greater risk, trade, business etc. Mild inflation provides incentives to take risk.

The FED may have been born in sin in 1913 but some of America's greatest days came after it was born. So inspite of Congress and the FED America succeeded, tremendously so. Yet now, it is failing. A combination of debt, limits to growth, short termism, entitlement and broken institutions are undermining it.

Money reflects people, it's society at large. If a money system is breaking, it reflects our own internal psyche, the psyche of society as well.

It swallowed a post o' mine last week and wouldn't give it back. The entire shebang was shut down. Who knows what it was all about ... 'maintenance' said someone @ Blogger.

I went over to a Wordpress.org blog. It's a lot of work and I lost all my followers. I had hundreds ... well, I only had a few, but i wish they would come back. I miss them ...

So far, Wordpress is a better blogging experience.

As for the future, who knows? Most cannot grasp the present, preferring nostalgia as a form of neuralgia ... or is it analgesia. Heaven -- to some -- is 15 cent a gallon gas and a big car with fins.

Reality is measurement for a lead suit. How did we get here? Nobody bargained for this!

The lead- lined present and the rapidly vanishing future leaves sheds little in the way of illumination. We are all in 'Terra Incognito'. The only signpost is the one that sez: "Welcome to the Ironic Universe".

Where the cats are dead and alive @ the same time and you can only measure what does not exist.

VK:Nicely put. People discount the human factor in everything. Everything cultural is created by the interaction of human activity and the natural environment. There's nothing magical about it.

For example, even though I'm a relative doomer, I'm not a doomsteader. Honestly, some misguided individuals think that if they hoard their gold and guns in some trailer or barn somewhere, they will be alright and all the "city" people will starve. Without stopping to think, even for a second, that in times of collapse everybody, everywhere, is going to be preparing in their own way, even people that live in the city.

Thereby, preparation cannot just be another useless argument like "rural vs. city" or "gold vs. dollars." You really have to take into account everything: geography, demographics, climate, access to water/farmland/energy/trade routes, politics, etc. And only when you start to consider all factors can you come up with a reasonable understanding of what's coming.

I'm very concerned about the U.S., for example, but it can't be reduced to just one component or issue. There are so many factors overlapping which is going to make it very difficult for the U.S. to stay together in the coming years.

This is true in spite of the fact that North America is actually one of the best places to be in a genuine collapse.

I.M Nobody, if you believe that man is basically evil, which is consistent with Judeo-Christian philosophy as the beliefs of our Founding Fathers, then you need a system of checks and balances. Were the Founding Fathers perfect individuals without foible? Of course not, but that is germane to my point. Whether the system of checks and balances that they created is ideal is another discussion.

Franny makes a good retort to Ilargi's friend's comment. A PM dealer must live in the current universe meaning paying his taxes, and buying Big Gulps, and pork rinds in fiat. Additionally, if he wants to augment his own stash of PM's for the Apocalypse, he can only make a profit by trading in and out with fiat. Even if he views fiat as transitional.

That said, I see all sorts of post apocalyptic problems with trading PM'S for stuff. I think the selling of gold from the formerly middle class will involve physical. Paper gold is a total Ponzi and its value will go to zero very early in the collapse. When the gold bugs lose their income producing employment, they will have to sell their gold to feed themselves and their families. As Stoneleigh put it, you don't sell what you want to sell, you sell what other people want to buy. And the rich will want to buy the gold of the formerly middle class gold bugs - but on the cheap.

Notice that the actual blog sites are full of Google, computer fed, personalized commercials, from Ukrainian mail order wives to Karnak money managers, but the comment page has nary a one. And it's the comment page that goes down and doesn't get repaired rapidly. Another amazing non-causal coincidence of the Universe.

As Stoneleigh put it, you don't sell what you want to sell, you sell what other people want to buy.

Great. I would very much like to own what others would, in the event of catastrophe, want to buy.

You can, of course, put your money in farmland instead and watch its price go down even faster than the price of gold.

Historically, farmers have always been one of the easiest groups of people to rob or tax. Your land is your ball and chain. There are occasions when the taxes and insecurity get so high that good land is abandoned.

In el G's recent notorious link is to be found an article which mentions good farmland being abandoned in California:

Many of the rented-out rural shacks and stationary Winnebagos are on former small farms - the vineyards overgrown with weeds, or torn out with the ground lying fallow. I pass on the cultural consequences to communities from the loss of thousands of small farming families. I don't think I can remember another time when so many acres in the eastern part of the valley have gone out of production, even though farm prices have recently rebounded.

I don't happen to believe that humankind is basically "evil". I am quite convinced that humankind are mostly good. That doesn't prevent us from also being quite dangerous. The lethal products of our intelligence will bite us equally hard no matter what the conceiver intended.

As far the checks and balances thing goes. Come On Man! You must know as well as we all do that they don't work unless there are constantly people in place that are determined to make them work. We ran out of people like that at least three generations ago. The vast majority of Usanistanis have no idea that such a concept even exists.

Nassim does have a good point about farmland. It should be presumed that it will be difficult to hold onto unless one owns a vast acreage and is in good with the local lizards. Those who have been here awhile may recall that I long ago projected the rise of a new system of feudal estates.

California is a special case though compared to the central and eastern regions of Usanistan. Small holdings were never a very big part of agriculture here. The Spanish Crown awarded huge land grants to favored subjects. When the Usanistanis liberated the State, their favored WASPish subjects proceeded to cheat the Hispanics out of their holdings and mostly kept them intact. In such an environment, Agribusiness caters almost exclusively to the needs of the large estates. Small holders won't have much of a chance at all. In essence, California has always had feudal estates. Though the Serfs are not very tightly bound to the estates. I'm guessing maybe not as tightly bound as they might like to be.

As I recall, Stoneleigh had made the following predictions regarding the USA.

Precious metals price will fall along with all other prices during the great deleveraging, once it really starts to accelerate. Formerly middle class physical gold holders will sell their gold to make ends meet to rich speculators, and this is primarily what will bring down the price. Institutions will also be selling gold to meet margin calls, though much of this will be paper gold which will later prove to be a worthless Ponzi.

However, PM's price will stabilize much earlier in the process than almost any other commodity other than basic necessities to live. So the point is, if Stoneleigh is correct in her prognostications regarding the great deleveraging, one will hold onto more wealth if one stays in cash and cash equivalents than precious metals. She does predict that the USD can and will fail eventually, as will all fiat, though the USD will be the last to fail of all the majors. If she is correct, then one might consider waiting now and buying gold early in the game on the way down before it stabilizes. She also points out that owning gold can be hazardous to one's health later on, a point already discussed on this thread.

though much of this will be paper gold which will later prove to be a worthless Ponzi.

el G,

Correct. This also implies that the real, physical, gold out there is a fraction of what is supposed to be there - think what happens when supply is much less than expected for pretty well everything else. Of course, if the "gold reserves" were sold a long time ago that would make this dichotomy (paper versus physical) even worse.

Of course, an effort may be made to "nationalise" physical gold like last time. However, something similar may be done to "cash" and its equivalents as well - only much more easily. Right now, I think the people who are liquid are also the elderly - it does not mean that most of the elderly are liquid but a lot of them are. As for the young, they have been almost wholly suckered by the attractions of debt. I imagine that a lot of young people would be quite happy if their debts were partly paid off by savers - that is what a low interest rate policy amounts to anyway.

I would love to be able to time things but that is not so easy. It was clear that silver was going up too fast but I decided to hang on to it as I am not a trader - I was in it for the long-haul. It was a conscious decision. A bad one perhaps but it is important to know one's limitations. :)

"That will be $200 billion please (or whatever it is that Iceland allegedly owes)."

Lol, the European lawyers would find a way to file a counter suit for a larger amount for lost airspace and all the attached expenses last summer when Eyjafjallajokull volcano had an upset stomach and barfed all over Europe.

"What is the probability of John Williams changing his tune soon or even late? His constancy is as is ilarg's ... suns that never set nor allow any contrary moon."

Why should they change their tunes? Neither has yet been proven wrong, and both can show solid chains of reasoning for their hypotheses.

Should the developed nations return to a path of modest economic growth with high employment and low governmental budget deficits, without experiencing crippling deflation and/or inflation, then Williams and TAE will have been mistaken.

But, since the current fiscal, economic and demographic path of EVERY major developed nation is TOTALLY UNSUSTAINABLE, period - Full stop - it seems quite likely that both will prove to have been mostly right, in the fullness of time.

Franny said...

"Re: PM dealers, the ones I know of both buy and sell, they make money on the spread. That doesn't mean they don't keep their own long term savings in gold."

Such may be true, but that doesn't explain why PM dealers have any stock to sell. If PMs were a sure thing, why would PM producers sell anything more than what was needed to cover the cost of production?

The bulk of PMs would be locked away in the heavily-guarded vaults of The Powers That Be... Unless, of course, PMs aren't a silver bullet. ;-0

muchtooloose said...

"I am talking about real gold and not paper gold. paper gold will sell at a loss but that is not the same for physical gold."

Depends on how many people need to offload their physical gold at the same time. Don't believe that there can't be a glut of physical PM sellers.

+|-+-|-+-|-+-|+

GS said...

"Honestly, some misguided individuals think that if they hoard their gold and guns in some trailer or barn somewhere, they will be alright and all the 'city' people will starve. Without stopping to think, even for a second, that in times of collapse everybody, everywhere, is going to be preparing in their own way, even people that live in the city."

Nassim said...

"Historically, farmers have always been one of the easiest groups of people to rob or tax. Your land is your ball and chain. There are occasions when the taxes and insecurity get so high that good land is abandoned."

I. M. Nobody said...

"Nassim does have a good point about farmland. It should be presumed that it will be difficult to hold onto unless one owns a vast acreage and is in good with the local lizards."

All of which was true of/happened in the former Yugoslavia, as it collapsed into civil war. Rural was no panacea, in fact it was often worse than being urban.

Harry Dent is the pop/investment slant on Strauss & Howe. He did tune me in to the whole demographics perspective & set the stage for me to totally "get" TAE's themes although I don't think he talked about peak oil (back in '97).

He does focus a little too much on specific numbers. When the Dow went higher than he thought he adjusted his theory to match.

Where he went wrong was to swear up & down that people shouldn't sell stocks in '98, '99 (they should hold on till '07). He totally ignored the depression of the early '20s which correlated pretty well to the early 2000s.

What he really got right was Japan, which is on an opposite demographic cycle from us. In early March I explained the whole demographic thing to a friend and said I was watching Japan very closely because it was about to get much better or much worse. Then of course, Fukishima. If they can make it their Pearl Harbor and not Katrina moment they will be looking OK in 10 years when we will not. It'll all be about energy.

I was thinking that if they focus on throwing themselves into various renewables & maybe algae or whatever & their homogenous society could accept powering down to some degree then they might make a smoother adjustment to a lower energy future then say America.

This pie in the sky hope assumes they can get Fukishima under control and can safely mothball the rest of their nukes.

I was in Burlington, VT this weekend & noticed a striking increase in solar panels on large trackers in very high end homes. It is apparently the "in" thing to do.

I thought I'd share my conflicted thoughts. The houses were of the 5000 sq ft variety (with possibly only 2 people living in them).

I'm off the grid & could get by on those fancy set ups but frankly those households probably use more energy just for their fridges. These are probably grid-tie systems so any input into the grid helps a bit, but doesn't help them in the event of a grid problem.

But wouldn't it be more helpful if they weren't such energy hogs? I got the sense that installing them was like absolution.

"I don't happen to believe that humankind is basically "evil". I am quite convinced that humankind are mostly good. That doesn't prevent us from also being quite dangerous. The lethal products of our intelligence will bite us equally hard no matter what the conceiver intended."

------------

I concur. The Path to hell is full of good intentions.

How is it that positive individual intentions commensurate to produce dangerous emergent consequences?

Garret Hardin's Tragedy of the commons is one possible explanation?...(The rational intentions of individual actors result in the collapse of common resource pools)

It could also be our ignorance/error in mapping our good intentions to reality. Our errors propagate, sum, and multiply to produce emergent properties unforseen by the individual actors. Sometimes these emergent properties are good, and sometimes they are bad. If so, it begs the question whether system scale factors into the frequency, intensity, and type of emergent properties.

A couple of Fred Reed's thoughts on the subject may help to illustrate why the intentions of the brainy don't much matter.Thinking About IntelligenceMore Trouble Than It's WorthI have decided that intelligence is pernicious, and should be extirpated. It just causes trouble. Practically every damn fool, deleterious thing our sorry race has done can be traced to intelligence. It is a bad idea. When it is not merely a bad idea, it is usually a waste of time....See, what happens is, as kids the bright don’t fit in. They don’t have much in common with anybody. They dress funny and get made fun of. They can’t dance. They don’t get laid much, or at all. This warps their heads. They retreat into isolation with others like them, become contemptuous of everyone else to get even, and deal in abstractions because it’s all they know. (I claim that if Marx had been able to jitterbug, the Soviet Union would never have existed.)

In short, a large IQ is an infallible predictor of emotional inadequacy.

Where intelligence unfortunately does work reasonably well is in the sciences. Really smart men have ideas; lesser men, usually engineers, make them explode; the least men get the triggers. This suggests that we ought to put a bounty on engineers.

Thinking About IntelligenceIt's not so much that the smart folks set out to invent species exterminating creations. It just happens to be what many of them are good at and they can often get paid for it. If they get paid well enough, they might even get laid.

So we may conclude that unless that bounty on engineers is enacted, there is no reason to go long on the human race.

Thanks for the response. Fred has valuable commentary indeed. Well Communicated. I concur.

How is dancing the jitterbug different from dancing with the cosmos?

The following is a relevant quote from David Orr on "What is Education For":

"If today is a typical day on planet Earth, we will lose 116 square miles of rainforest, or about an acre a second. We will lose another 72 square miles to encroaching deserts, as a result of human mismanagement and overpopulation. We will lose 40 to 100 species, and no one knows whether the number is 40 or 100. Today the human population will increase by 250,000. And today we will add 2,700 tons of chlorofluorocarbons to the atmosphere and 15 million tons of carbon. Tonight the Earth will be a little hotter, its waters more acidic, and the fabric of life more threadbare.The truth is that many things on which your future health and prosperity depend are in dire jeopardy: climate stability, the resilience and productivity of natural systems, the beauty of the natural world, and biological diversity.It is worth noting that this is not the work of ignorant people. It is, rather, largely the result of work by people with BAs, BSs, LLBs, MBAs, and PhDs. Elie Wiesel made a similar point to the Global Forum in Moscow last winter when he said that the designers and perpetrators of the Holocaust were the heirs of Kant and Goethe. In most respects the Germans were the best educated people on Earth, but their education did not serve as an adequate barrier to barbarity. What was wrong with their education? In Wiesel's words: "It emphasized theories instead of values, concepts rather than human beings, abstraction rather than consciousness, answers instead of questions, ideology and efficiency rather than conscience."The same could be said of the way our education has prepared us to think about the natural world. It is a matter of no small consequence that the only people who have lived sustainably on the planet for any length of time could not read, or, like the Amish, do not make a fetish of reading. My point is simply that education is no guarantee of decency, prudence, or wisdom. More of the same kind of education will only compound our problems. This is not an argument for ignorance, but rather a statement that the worth of education must now be measured against the standards of decency and human survival - the issues now looming so large before us in the decade of the 1990s and beyond. It is not education that will save us, but education of a certain kind."

Hmmm, I note that Wiesel chose not to mention the parts that members of his tribe, which Fred says is the smartest on the planet, played in designing and perpetrating things nuclear. Elie has more Holocaust cards up his sleeve than a Mississippi Riverboat Gambler. It was a very bad thing, but it was not the first, last or only bad thing. Far worse things are yet to come.

Fred also has several good commentaries on the subject of education and what he thinks should be done about it. I won't bother linking to any. I will simply undignify myself by bragging that I followed his prescription almost to the letter and it seems to have yielded pretty good results.

Nevertheless, I have participated in some things that probably should never have been done. It's so often hard to know until after the fact. I didn't mean no evil.